An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Andrew A. Anabila
Pace University

Abstract: Prior research has documented high excess returns for neglected firms, due to information deficiency premium, and inefficient pricing. I use analysts’ forecasts of firms they follow, and the historical co-movement of the results of neglected and followed firms to predict earnings for neglected firms out of sample. I evaluate the earnings predictions with two benchmarks: predictions from a drift-adjusted seasonal random walk model, and predictions from an information transfer model that uses realized earnings rather than analysts’ forecasts of the followed firm. Using the predicted earnings, I predict positive excess returns and improve on existing trading strategies, namely book-to-market, trading volume, size. Combining the earnings predictions with an F_Score developed in Piotroski (2000) yields even higher excess returns. This study shows that analysts’ forecasts of followed firms can be used to predict returns of neglected firms.

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