Analysts' earnings forecasts and trading flows by various investor types in the Korea stock exchange

Abstract

We examine relationships among analysts' earnings forecast revisions, stock returns, and trading flows by various investor types in the Korea stock exchange. We report three main findings. First, analysts' earnings revisions and stock returns are strongly positively correlated. This supports the view that analysts' earnings forecasts contain valuable information that is worth pursuing. Second, net stock purchases by foreign investors tend to precede upward revisions of earnings forecasts. Domestic individuals' trading flows exhibit the opposite pattern. Third, for the sub-sample of stock returns that are concurrent with large revisions in analysts' forecasts, net stock purchases by foreign investors also tend to predict a positive stock return. On the whole, our findings suggest that foreign investors are not informationally disadvantaged with respect to earnings news.