Andy Moniz, Gurvinder Brar, Christian Davies, and Adam Strudwick
ABSTRACT
Earnings momentum strategies that the majority of systematic equity investors employ
typically do not identify the piece of information that initially triggers the change in
analyst forecasts. Here we look at higher frequency information contained within cor-
porate news flow as a leading indicator of analyst revisions to understand what type of
information causes analysts to revise their earnings expectations, how the informational
content of the signal varies according to the news catalyst, and whether investors can use
news flow signals as input into their models.
Our results show that news-flow-based strategies can add value to investors. Those
that can react quickly can benefit from the short-term momentum following particular
news items and gain an information advantage by incorporating news flow ahead of
analyst revisions. Alternatively, investors can enhance performance of existing earnings
momentum strategies by either combining this with a news flow signal or by trying to
forecast which companies are likely to see analyst revisions post news announcements.
8.1 BACKGROUND AND LITERATURE REVIEW
Equity analysts play an important role in collecting and processing company
information and disseminating this to investors. The value contained in earnings fore-
casts is attributed to analysts’ abilities to gather information from a variety of sources
and process it in a timely manner to generate superior forecasts. Analysts’ relationships
with company management are often considered to be important and may provide a
valuable insight. If analysts are able to process this information better than the market,
they should be able to identify situations in which the market has overreacted or
underreacted to earnings.
Could it be the case that analysts are slow to incorporate news flow into their
valuation models or are unwilling to revise estimates until they have seen the hard
evidence of earnings results? Moreover, the earnings revisions strategies that the
majority of our clients employ typically do not identify the piece of information that
has triggered the change in forecasts. We only observe the actions of analysts rather than
The Handbook of News Analytics in Finance Edited by L. Mitra and G. Mitra
#2011 John Wiley & Sons