Analysts' Expectations and Stock Returns on the London Stock Exchange
Abstract: This study examines the anomaly between stock returns and analysts' forecasts, with reference to previous findings in the US market. We replicate La Porta's (1996) study, where he finds that betting against analysts' forecasts tends to be a good strategy, as the stocks that analysts are most optimistic about earn poor returns relative to the stocks that analysts are most pessimistic about. We discover that his findings do not hold in a different market, the UK, even when taking into consideration the risk exposure of portfolios formed on a long-term growth basis. While analysts do exaggerate their predictions, affected by a series of positive or negative news, the results suggest that their expectations are not representative of all markets.
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