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The Handbook of News Analytics in Finance by Leela Mitra, Gautam Mitra

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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 forecasts 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 their motivations such that it is difficult to differentiate between analyst herding that is imitation- or information-driven. Since market prices are driven by expectations of corporate fundamentals and new information leads to a revision of those expectations, here we look at higher frequency information contained within corporate news flow as a leading indicator of analyst revisions to understand how different types ...

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