The current issue and full text archive of this journal is available on Emerald Insight at:

www.emeraldinsight.com/1940-5979.htm

Evolution in
Earnings forecast revisions and the Tunisian
securities prices evolution in the stock market

Tunisian stock market

Ahmed Bouteska 165
Faculty of Economics and Management of Tunis,
Received 19 March 2018
Tunis El Manar University, Tunis, Tunisia, and Revised 17 July 2018
Boutheina Regaieg Accepted 24 July 2018

Faculty of Law, Economics and Management of Jendouba,

University of Jendouba, Jendouba, Tunisia

Abstract
Purpose – The purpose of this paper is to investigate the effect of forecast earnings’ revision on the evolution
of securities prices in the Tunisian stock market.
Design/methodology/approach – A portfolio study of investor reaction and stock prices following
revisions is first conducted to highlight the existence of abnormal return related to analysts’ earnings
revisions. Analysis is then supplemented by a second empirical investigation based on the panel data to
quantify the effect of revision on the abnormal profitability of securities.
Findings – The evidence found in this paper validates the fundamental theoretical hypothesis according to
which the psychological bias resulting from the effect of the forecast earnings revision is related to the
abnormal profitability of the securities. The authors conclude the importance of the revision impact on
investors’ behavior on one hand, and the informational content of the analysts’ forecasts and the biases which
they lead on the other hand.
Originality/value – Globally, the empirical illustrations largely validate the findings of behavioral models
particularly that of Kormendi and Lippe (1987), Cornell and Letsman (1989), Beaver et al. (2008) which states
that investors under psychological bias, react to the effect of forecast earnings revision by an abnormal
variation in stock prices.
Keywords Stock prices, Abnormal return, Financial analysts, Earnings forecast revisions
Paper type Research paper

1. Introduction
Evaluating an asset is one of the major concerns of financial theorists. To evaluate a stock,
analysts’ earnings forecasts are considered as good estimators of future income streams. The
job of financial analysts is to predict what will be found in companies’ financial reports, and to
respond to the publication of these financial data, either by reiterating their forecasts and
recommendations or by revising them if the financial results are good far from their
expectations. In the latter case, they try to explain their forecast errors and give the reasons
why the company’s actual results largely deviate from their forecasts. The revisions reflect the
latest shifts in financial analysts “opinions on companies” future earnings per share (EPS).
Two visions of financial analysis exist regarding the usefulness of earnings forecasts
made by financial analysts for portfolio management. The first view is cynical assuming
that analysts revise their estimates on a quoted value after observing an abnormal positive
or negative behavior of the stock market. According to this view, the usefulness of these
forecasts would be low since they would only follow the common opinion investors already
integrated into the stock market. The second vision is angelic assuming that analysts
review their forecasts early enough for them to have an informational content compared to Review of Behavioral Finance
the information conveyed by the market. Vol. 11 No. 2, 2019
pp. 165-187
© Emerald Publishing Limited
1940-5979
JEL Classification — D84, G10, G11, G14, O57 DOI 10.1108/RBF-03-2018-0025
RBF According to the theory of efficient markets, the information is instantly reflected in
11,2 stock prices after the diffusion of revisions. The price of a security incorporates among other
things, the information conveyed by the estimated earnings. Theorists assume that the price
of a stock is necessarily related to the informational content of EPS forecasts. It then
becomes essential for investors to have a good quality of financial analysis for all securities
listed on the stock market. In a market that owns this property, the use of EPS forecast
166 revisions as part of portfolio management strategies is therefore unnecessary. If this
hypothesis is true, it would be difficult to justify the costs generated by the search of
information and the financial analysis. It seems to us that the existence of financial analysis
offices proves that the information they disseminate allows users to generate profits.
Since the early work of Givoly and Lakonishok (1979), the analysis of the informational
content of earnings forecast revisions has attracted the attention of both the academics and
practitioners. Indeed, financial analysts in their role as producers of information attract
investors to the newly listed company. A potential source of value from financial analyst
reports may be the ability of analysts to collect useful information to identify over or
under-valued securities. But it should be noted that in the literature, the empirical studies
focus on the US EPS forecast revisions. The work of Capstaff et al. (1995) is one of the first
studies examining EPS forecasts of European companies. However, some academics dispute
the use of revisions in investment strategies. They consider that revisions do not convey
more information than that already present in the prices. These authors finally find that the
current revisions are only a reflection of past and recent stock market behavior. On the other
hand, other academics consider that financial analysts can reveal information not yet
incorporated into the prices. They empirically justify their opinions by highlighting the
encouraging portfolio management results based on the EPS forecast revisions.
By observing the various work drawing attention to the importance of informational
content of both the analysts’ recommendations and earnings forecasts revisions in the
investors’ decisions, it becomes interesting to devote this paper to study the revisions’
announcement effect. We extend the empirical research of the association between market
returns, EPS forecast revisions and psychological biases by conducting analysis for the
Tunisian market. The focus on the Tunisian stock exchange is particularly interesting
because of the lack of evidence on the earnings forecast as well as the forecasts revision’s
effect in developing and emerging markets. For limited data raisons, the existent research uses
only questionnaires or factor analysis method. The literature on the relationship linking either
the EPS forecasts or the forecast revisions with the profitability of securities remained mainly
focused on the USA and developed financial markets. The choice of Tunisian Stock Exchange
is also motivated by its specific features mostly common to the emergent markets. It is tight
and poorly capitalized; only a small number of firms operating on it. It is also highly volatile,
where returns are not-normal and information is not always available, implying supplement
transaction costs. This is combined with insufficient skill and qualification of existent
financial analysts. All these factors affect the performance of analysts’ earnings forecast and
subsequently their revisions as shown by a number of studies (Barber et al., 2001; Bradley
et al., 2016; Fang and Yasuda, 2014). Thus, our contribution through this paper is to extend the
existent literature by formulating general and convincing answers to the issue of the forecast
revisions in emergent stock markets and its announcement effect on investors. A number of
questions arise. First, to what extent do the various components of a financial analyst report
have informational value to investors? Does the market reaction efficiently reflect the
information contained in these analyst reports? Can stock price developments be anticipated
by the sign of forecast revisions? Finally, what is the impact of the earnings revision
announcement on investors as well as the returns on securities?
This paper is organized as follows. Section 2 exposes the academic literature discussing the
contribution of empirical studies to the relationship between profitability of securities and
earnings revisions and forecasts, with a focus on investor reaction and market performance as a Evolution in
result of these revisions. Section 3 presents the data and descriptive statistics. Section 4 presents the Tunisian
the results and discussions of the parametric analysis concerning the empirical effect of stock market
revisions on stock price evolution in the Tunisian stock market. Finally we conclude in Section 5.

2. Empirical literature review

The relationship between the evolution of stock prices and the announcement of earnings 167
forecasts and revisions by financial analysts is at the root of a large empirical literature.
The Ball and Brown (1968) study is the first work pointing out the same direction taken by
the annual variations in published earnings and the annual variations in share prices over
the same period. The authors examine the American market over the period 1957–1965.
They show that in this market nearly 90 percent of the information disseminated during the
new earnings publication is actually reflected by the share prices already one month before
this publication. As a result, price movements seem to predict changes in the future earnings
of companies. Ball and Brown (1968) conclude on the assumption that forecasts and
revisions of earnings would better capture future price changes.
Since this preliminary work, a mainly US literature has continued the analysis of the
relation linking either the EPS forecasts or the forecasts revisions with the profitability of
securities. Elton et al. (1981) show that the ex ante knowledge of companies with the highest
earnings growth rates would generate significant abnormal returns. The authors then
propose to build a portfolio management strategy based on forecasts of earnings growth
rates. However, they find that buying the highest-price forecast earnings securities reports
as much as buying the lowest-price forecast earnings ones. Finally for Elton et al. (1981), one
way to achieve abnormal return is to identify securities on which the consensus misjudged
future EPSs. The greater the forecast error between the “good” forecast and the consensus
forecast, the larger the potential for abnormal return.
Many authors have analyzed the quality of the EPS forecasts and the impact of their
evolution over time – that is revision – on stock prices, since the beginning of the 1980s. In
addition, researchers are questioning the potential applications of previous studies to
portfolio management. In particular, they wonder if once the revisions broadcast by the
consensus, the information content they have delivered can still produce abnormal returns.
According to L’Her and Suret (1991), the informational content of the revision at the time of
its diffusion by the consensus does not seem established. They believe that basing portfolio
management on the revisions criterion only becomes profitable if investors have these
revisions before they are made public. These authors examine over the period 1985–1987,
the IBES consensus forecast for a sample of nearly 190 Canadian companies. They are
particularly interested in the impact of revisions on the stock prices evolution. As
Abdel-khalik and Ajinkya (1982), they show that to benefit from abnormal returns, it would
be necessary that nearly 30 days before the official diffusion, investors have the earnings
forecasts. Once the forecasts are made public, the possibilities of achieving abnormal
returns remain marginal because most of the information content of the revisions is already
taken into account by the market.
Similar conclusions are mentioned in the work of Dimson and Marsh (1984). The authors
are working on the IBES consensus forecast revisions for the 206 largest English market
capitalizations in the 1980 and 1981 years. Admittedly they find that much of the
information content of the revisions seems already integrated by the market during the
broadcast month revisions. However, Dimson and Marsh (1984) show that by reacting
quickly, managers using forecast revisions improve the performance of their funds.
In the academic community, many authors believe possible to obtain abnormal returns
from revisions. Therefore, they justify the usefulness of revisions by proposing various
investment strategies based on these variables. Givoly and Lakonishok (1979, 1980) study
RBF the informational content of revisions and analyze their impact on US equity prices. They
11,2 study nearly 6000 EPS forecasts on 49 companies from 1974 to 1979. These authors examine
the abnormal returns produced by different strategies based on both the sign and the extent
of revisions. Thus according to the sign of revisions, they compose a positively revised
portfolio of securities and a negatively revised one. The bimonthly profitability is then
recorded. The results show an abnormal return of −1 percent for the negative revisions
168 portfolio and 2.7 percent for the positive revisions one. The authors believe that investors
can outperform the market by using information from revisions.
Stickel (1991) examines the security return around the date of announcement of an EPS
forecast revision over the period 1981 to 1985 for the case of USA. According to the author,
the revisions of EPS have an impact on the share price of security but the price does not
immediately assimilate all the information contained in these revisions. Return adjusts in
the direction of revision (up or down) over a six-month period following the announcement.
Stickel studies 173,620 annual EPS forecast revisions. The market reaction over the
six months following the announcement of revisions is 8.22 percent for upward revisions
and −5.44 percent for downward revisions. The author publishes in 1992 a study on the
reputation and performance of financial analysts in which he demonstrates that the most
reputable analysts make predictions more accurate and more often than other analysts. The
reputation of the analyst seems to play a role only during upward revisions. Expectations
rose with reputable analysts which have an impact on the higher security return by
0.21 percent compared to those of the less well-known analysts. Stickel confirms that the
impact of revisions on prices is generally positively correlated with the direction of revision
and more pronounced for smaller companies.
In the Canadian market, L’Her and Suret (1991) analyze the market reaction to EPS
forecasts revisions from 1985 to 1987. The authors find that revisions take place even
though the market is aware of the information. Taking into account forecasts before they
are made public allows the investor to realize abnormal returns. Finally, all the
information is not reflected in stock prices at the time of the publication of forecasts (the
prices adjust following the announcement over a period of six to nine months). In the six
months following the announcement of revisions, the stock prices of securities that have
been revised upwards have an abnormal profitability of nearly 3.1 percent. The authors
note that it is possible to benefit from the revisions of EPS forecasts if the business line of
the firm and the announcement date of revision are taken into account. At American
markets, Park and Stice (2000) link analyst’s previous forecasts to the stock market
extent following the revision of this forecast made by the same analyst and in favor of the
same company. The authors focus their study on analysts whose previous predictions
turned out to be 80 percent closer to realized EPS than the consensus was. Thus,
they show that the revisions made by these analysts that they describe as “superior”
have a greater impact on the market reaction. This indicates that financial market
participants distinguish analysts by their ability to provide the most possible accurate
forecasts. This distinction is reflected in the market reaction to the announcement of
forecast revisions.
Capstaff et al. (2000) analyze the reaction of share prices to the announcement of EPS
forecasts revisions on three European financial markets. The sample consists of 79,047
revisions on the English market, 43,606 on the French one and 35,746 on the German one for
the period 1988 to 1998. This study shows that the downward revisions have a greater impact
on the market than those up the month following the announcement regardless of the country.
The reaction to earnings forecast revisions is stronger in the UK market regardless of the
direction of revision. Thus, the reaction of the English, French and German markets to the
earnings forecasts revised downwards are, respectively, −2.5, −1.8 and −2.1 percent
over a month following the announcement of revisions. Levasseur et al. (2001) examine
the EPS forecast by financial analysts in France for the period 1987 to 1995. Results reveal that Evolution in
changes in consensus and dispersion of forecasts are, respectively, positively and negatively the Tunisian
related to securities return. Indeed, the profitability of securities for which the average forecast stock market
is revised upwards while the dispersion decreases is by 1.78 percent in seven months.
Conversely, the profitability of securities for which the average forecast is revised downwards
while the dispersion increases is by −1.14 percent over the same period. The authors conclude
that the impact of the coming of information on stock prices does not only depend on the 169
direction and magnitude of the forecast revision, but also on its impact on the dispersion of
analysts’ expectations.
Gleason and Lee (2003) look at several factors that can explain the movement of stock
market prices in analysts’ predictions of EPS. The authors find that the market does not
distinguish between revisions to forecasts that provide new information and those that tend
toward consensus. Stock adjustment is faster and better when revisions are done by
renowned analysts. It appears that the amplitude of stock prices after the revisions is
negatively related to the number of analysts covering the company. The sample consists of
more than 370,000 annual EPS forecasts concerning the USA over the period 1993 to 1998.
The study reveals that a downward revision results in a one-year fall in the stock price from
4.4 to 5.7 percent. To upward revision results an increase in the share price from 3.8 to
4.5 percent over one year. The authors point out that the evolution of the three-day share
price around the announcement date of revision only explains 18.5 to 20.8 percent of the
price magnitude at one year for less renowned analysts. On the other hand, this return
represents 23 to 40 percent of the price range for famous analysts.
In a recent taxonomy of research that examines the role of financial analysts in capital
markets by categorizing papers published since 1992, Ramnath et al. (2008) suggested
avenues for further research in seven broad areas. They highlighted the analysts’ decision
processes, the nature of analyst expertise and the distributions of earnings forecasts, the
information content of analyst research, analyst and market efficiency, analysts’ incentives
and behavioral biases, the effects of the institutional and regulatory environment, and
research design issues. In this way, Bonner et al. (2007) provides evidence that the media
plays a role in the stock price formation process beyond its effects due to coverage of firms.
By examining the effect of analyst celebrity, they find that all measures of media coverage
are positively related to investor reaction to the forecast revisions in the short window
(−2, +2) surrounding the release. Specifically, their results suggest that the media’s
coverage of analysts, key information intermediaries, affects stock prices. They indicate also
that substantial variation in investor reaction to forecast revisions is not accounted for by
previously examined performance-related factors. In addition, results on the association
between the excess returns around the earnings announcement date and the analyst’s media
coverage are consistent with investors initially reacting too strongly to forecast revisions
issued by celebrity analysts.
The Hall and Tacon’s (2010) research focused on the value of analysts’ earnings
forecasts and stock recommendations for investment decision-making, shows that the
earnings accurate forecasters cannot be identified on the basis of their track record. While
there is statistically significant evidence that forecasting ability is persistent, it is not
sufficient to generate profitable stock recommendations in the future. Even with these
authors finer segmentation of analysts there is no difference in their ability to make
profitable recommendations in the future. Furthermore, regardless of forecasting ability,
they conclude that analysts are pre-disposed to recommend stocks with low book-to
market ratios and positive price momentum. This bias may impede their ability to make
profitable recommendations. The Beaver et al.’s (2008) study highlight the necessity to
take into account the combined impact of forecast errors and revisions on share prices.
Their model reveals that forecast errors and revisions each have a significant impact on
RBF stock prices. This suggests that they both convey information. This result is confirmed
11,2 over the period 1984 to 2006. The authors specify that a model ignoring one of the two
measures may lead to a misinterpretation of the results concerning the impact of the
effects of surprise earnings on the profitability of the securities.
Brown and Huang (2013) extend the literature on informativeness of analyst research by
showing that recommendation forecast consistency is an important ex ante signal regarding
170 both firm valuation and earnings forecast quality. Investors and researchers can use
consistency as a salient, ex ante signal to identify more informative analyst research and
superior earnings forecasts. By defining a stock recommendation-earnings forecast pair as
consistent if both of them are above or below their existing consensus, the authors find that
58.3 percent of recommendation-forecast pairs are consistent in their sample. They
document that consistent pairs result in much stronger market reactions than inconsistent
pairs. Analysts making consistent recommendation-forecasts make more accurate and
timelier forecasts than do analysts making inconsistent recommendation-forecasts,
suggesting that consistent analysts make higher quality earnings forecasts.
Simon (2014) shows that a variable he develops and denotes as forecasting complexity,
i.e. the extent to which analysts’ earnings forecasts vary when predicting a firm’s earnings,
is important in explaining variation in the persistence of the relative forecast accuracy of
analysts. When the author controls for forecasting complexity, the probability of analyst
relative forecast accuracy to persist is reduced by about half. More importantly, when he
forms portfolios using recommendations of analysts identified as superior in two
consecutive periods, controlling for forecasting complexity, he find significant abnormal
returns after adjusting for the Fama–French and momentum factors.
Empirical research shows that the abnormal return accumulated after the revision
diffusion is often the same sign as this revision. A positive revision generally corresponds to
a securities buying behavior by investors, which generates additional abnormal
profitability. On the other hand, a negative revision generally corresponds to a sales
behavior, which results in a lower yield of the securities. This association reinforces the role
of financial analysts by emphasizing their ability to anticipate the direction of corporate
benefices. It highlights the quality of the informational content of the revisions and confirms
the usefulness of revisions in the context of investment strategies. At the end of this
empirical studies review, we ask the following questions: what is the impact of forecast
earnings revisions by financial analysts on the management of investors’ portfolios? And to
what extent does earnings announcement effect persist as a result of the revision and is
materialized by abnormal returns on securities in the Tunisian stock market? We try in this
paper to provide the appropriate answers. Our fundamental theoretical hypothesis is that
the psychological bias resulting from the effect of revision of the forecast earnings is related
to the abnormal profitability of the securities.

3. Data and descriptive statistics

3.1 The sample
The full sample of this paper is composed of 56 companies listed on the Tunisian Stock
Exchange for at least two years. The firms in our sample share a common feature: that of
announcing a result. In a first step, all the 56 companies are analyzed by the
non-parametric study. Then for our parametric study, only companies whose have been
rated as significant by the market model are retained from our sample, so a total of
41 companies (Table I).

3.2 Data and variables

Financial data such as the daily price of the shares and those of the Tunindex are provided
by the Tunisian Stock Exchange. In our portfolio analysis, the Tunindex is used as a
Companies listed on the Tunisian Stock Exchange
Evolution in
ATB UIB SPDIT-SICAF Sotuver the Tunisian
UBCI STB TL SIAME stock market
BIAT BTE SOTRAPIL TPR
Attijari Bank ASTREE WL POULINA GPH
Sotetel STAR ESSOUKNA ARTES
TUNISAIR MG Alkimia SOPAT
SALIM SERVICOM SFBT CIM.BIZERTE 171
Companies composing our empirical study
Amen Bank BNA Air Liquide MNP
ENNAKL BT ICF NBL
Hexabyte CIL PLACE-TUNISIE POULINA
SIMPAR GIF-FILTER TUNISIE RE SFBT
Attijari Lease SITS ADWYA SIPHAT
ATL SOTUMAG ASSAD STEQ
BH TUNI-INVEST Electrostar TELNET
ARTES Attijari Bank BIAT ESSOUKNA
Somocer Sotetel Sotuver STAR
STB TL TPR UBCI Table I.
WIFACK BANK The full sample

market index. The forecasted profits and those realized are extracted from the
“guide stocks” of the following intermediaries on the stock exchange: MAC sa, Tunisia
Values, Amen Invest, Cap Finance and CGF. Three variables are used: the surprise
variable (SUE), the earning variation variable (EPS) and the revision of prevision
variable (REV ):
(1) SUE variable:
The Surprise Unexpected Earnings (SUE) variable measures the surprise of
earning announcement. The individual earnings forecasts are aggregated by
calculating earnings surprises following the announcement date of earnings
for each security. These earnings surprises are based on systematic comparisons
of an achievement and a forecast. All these comparisons are standardized over the
share price:

SUEi ¼ UEi =P i ; (1)

where UEi is the unexpected earnings, which is equal to the difference between
EPS (i) realized and expected EPS (i), such as:

UEi ¼ EPS realized–EPS expected: (2)

Pi is the price of the security on the day preceding result announcement. The expected
earnings represent the earnings forecasted by the financial analysts.
These earnings surprises reveal whether investors tend to underestimate or overestimate
earnings announcements based on the average error for each horizon. In addition, the SUE
variable gives additional information by indicating the share price proportion of the
difference between the realization and the earning forecast.
The SUES1 announcement surprise corresponds to the first-half SUE, and SUES2
corresponds to the SUE of the second half of the year. If the date of the results’
announcement occurred at the beginning of the year, the surprise of the announcement
RBF (SUE) corresponds to the SUE of the first half of the year. If the date of the announcement
11,2 was made toward the end of the year, the SUE corresponds to that of semester 2:
(2) EPS variable:
The earning change corresponds to the difference between the EPS realized
during the second half of the year and the one realized in the first half of the same
year, as follows:
172 EPS ¼ EPSS2 –EPSS1 ; (3)

with EPSS2 means to the EPS realized during the second half of the year and EPSS1
the EPS realized during the first half of the same year. The change in EPS realized
EPSS2 is the difference between the EPS realized between the second and the first
half of the year. The change in EPS realized EPSS1 is the difference between the EPS
realized between the first half of the year and the second half of the previous year.
(3) REV variable:
The REV variable is the revision of profit forecasts prior to the profit
announcement date. It corresponds to the difference between two current profit
forecasts by financial analysts. This allows evaluating the evolution of the forecast
for each security on the market. Most analysts readjust their forecasts and
recommendations as soon as possible after profit announcements by companies:

REVi;t þ 1 ¼ EPS expectedi;t þ 1 –EPS expectedi;t : (4)

3.3 Descriptive statistics

Table II provides a summary of the preliminary analysis of data for 652 observations
composing our empirical study. Descriptive statistics show comparatively higher averages
and greater volatility for the earnings revision (REV ) and the realized earnings (EPS)
variables. An average of 1.22 and a standard deviation of 2.46 are recorded for the REV
variable. The examination of the simple correlations indicates a positive relationship
between the different variables tested. The correlations regarding the explanatory variable
REV, robust associations are found with the both variables EPS and the SUE.

3.4 Non-parametric analysis

As shown in the literature review, investors react to the market by following the
recommendations of financial analysts. The revision implying the change in status of
recommendations: the improvement of the recommendation (at the time of purchase) or the
degradation of the recommendation (at the time of sale) are events accompanied by a significant

Descriptive statistics
Mean Maximum Minimum SD
REV 1.2272 30.0540 −6.4068 2.4621
SUE 0.0027 1.5934 −0.8218 0.0853
ΔEPS 0.0440 25.1759 −31.1565 2.6605
Simple correlations
REV SUE ΔEPS
Table II. REV 1.0000 0.0987 0.4991
Summary of statistics SUE 0.0987 1.0000 0.0197
over the period ΔEPS 0.4991 0.0197 1.0000
2010 S1–2017 S2 Note: n ¼ 652
reaction of the profitability on the financial markets after publication of these recommendations. Evolution in
This non-parametric study tries to analyze the evolution of stock prices following the revision of the Tunisian
the realized and the forecasted earnings by financial analysts on the Tunisian stock market. We stock market
begin by presenting the distribution of recommendations (Table III). We use our sample of
56 companies that includes more than 4,500 recommendations for securities quoted on the
Tunisian Stock Exchange during the recent period from March 2010 to December 2017. The
recommendations of the intermediaries are revised by the financial analysts each month when 173
the interim and final financial statements of the listed companies are published. The
recommendations were divided into two categories:
(1) if the recommendation is “buy,” “maintain” or “reinforce,” this is a positive
recommendation for the security; and
(2) if the recommendation is “alleviate” or “sale,” it is a negative recommendation
against the principal.
We note that the percentage of positive recommendations amounts to 78.9 percent, while
that of negative recommendations barely reaches 21.1 percent. Among the positive
recommendations, Figure 1 indicates that 43 percent favor action to retain the security,
26 percent recommend strengthening it, and 10 percent are willing to buy it. Examples
include Amen Bank, SFBT and TPR which have been recommended for purchase for
several months. Among the negative recommendations, 16 percent of the recommendations
favor an action to reduce the security, and only 5 percent recommend selling it. Finally, three
titles are recommended for sale, Alkimia, MG and ML.
The change in pre- and post-revision earnings reflects investor reaction to the analyst
revision. A negative change in stock prices is the result of an unfavorable reaction from
investors to a downward revision of earnings, which consists of a sale of securities on the
stock market. Inversely, a positive price change reflects a favorable reaction from investors
buying securities after an upward revision of earnings. Thus, we try in the second part of is
non-parametric analysis to reconcile two types of variables for our sample of 56 companies
over the year 2013. The first variable is the sign of the revision carried out by analysts on the
stock market in relation to past realized and forecasted earnings. A downward revision of
earnings is considered as a negative revision, while a revision of the upward forecast earnings
is noted as a positive revision. The second analysis variable is the percentage change in the
price of the pre- and post-revision securities. For this end, we calculate the mean of daily prices
for the two periods of one month before and after February 4, 2014, which is considered as the
date of recommendation revisions by the majority of analysts on the Place of Tunis. The
pre-revision period extends from the earnings announcement day to the revision day,
while the post revision period extends over a period of one month from the revision date.
The purpose of our non-parametric study is to detect an abnormal profitability of securities
following the revision of the forecast earnings. Our basic hypothesis predicts that if a positive
or negative revision occurs, the price of securities varies in the same direction, and thus there
is a general relationship between the sign of the revision and the direction of the price trend,
traduced by an abnormal return of securities. This assumption is based on the idea that a
positively revised security is rising as a result of the investor’s request to buy, while a
negatively rated security is down as a result of its sale by investors looking to get rid of them.
The variables to be examined are presented in Table IV. The first point is that the
revision of the earnings compared to the past, has mostly a positive sign. This first fact
reflects the optimism of analysts on the Tunisian stock market and this despite the hard
episode encountered by the Tunisian companies during the year 2013. Our second
observation is the direction of change in the stock prices depending on the sign taken by the
earnings revision variable. It is noted that following a positive revision, price movements are
mostly upward, while a negative revision is generally associated with a rate of prices change
RBF Companies Buy Maintain Reinforce Alleviate Sale
11,2
Amen Bank 33 13 35 – –
ATB 13 62 7 – –
BT – 4 78 – –
BH 10 60 2 10 –
UBCI – 39 – 43 –
174 BIAT 56 4 22 – –
Attijari Bank 43 8 31 – –
BNA – 80 2 – –
UIB – 53 19 10 –
STB – 28 – 54 –
BTE – 24 45 13 –
ASTREE – 63 – 19 –
STAR 1 50 24 7 –
ICF – 30 38 14 –
Air Liquide – 82 – – –
Alkimia – 18 16 25 23
SFBT 58 24 – – –
Tuninvest – 82 – – –
PLAC.TSIE – 70 12 –
SPDIT-SICAF 1 25 56 – –
TL – 16 66 – –
CIL 18 – 64 – –
ATL 9 14 59 –
Sotetel – 23 2 27 30
Tunisair – 2 – 67 13
Monoprix 13 53 11 5 –
SIMPAR 7 23 52 – –
Sotuver 13 20 49 – –
SIAME – 69 – 13 –
SOTUMAG – – 37 – –
MG – 68 13 1 –
Electrostar – – – 1 81
SOTRAPIL – 70 12 – –
SIPHAT – 3 – 61 18
STEQ – 3 – 66 13
Somocer 13 53 16 –
ASSAD 2 31 44 5 –
GIF-FILTER – 69 – 13 –
SITS – 45 22 15 –
WL – 69 – 13 –
ESSOUKNA 20 9 40 1 12
ADWYA 13 69 – – –
TPR 58 – 24 – –
POULINA GP H 13 45 24 – –
ARTES 24 10 48 – –
SOPAT – 24 17 41 –
CIM.BIZERTE – 20 13 49 –
SERVICOM – 28 26 28 –
SALIM – 59 20 3 –
TUNISIE RE – 22 60 – –
ENNAKL 17 24 32 9
Table III. ML – 21 – 30 31
Distribution of the TELNET 3 56 20 – –
financials analysts’ Attijari Lease. – 55 27 – –
recommendations Hexabyte – 11 – 59 –
Period of NBL 13 37 4 – –
analysis: March Total 451 1,940 1,161 730 221
2010–December 2017 Source: Authors
 5%
Evolution in
10% the Tunisian
16%
stock market
Buy

Maintain

Reinforce
175
43% Alleviate
26% Sale Figure 1.
Financial analysts’
recommendations
distribution in
percentage (March
2010–December 2017)
Source: Authors

that is also negative. This observation is the case of the majority of the values except for a
few companies such as Astree, Sopat and Alkimia – whose price movements are probably
related to other aspects that do not fall within the scope of our study – makes it possible to
detect the presence of an abnormal profitability linked to the revision variable. This
abnormal performance may be positive or negative depending on the sign of the revision.
Changes in prices of the revised securities over the year 2013 are illustrated graphically.
Figure 2 shows that securities with a positive revision outperform those with a negative
revision. For a market rate of 8.6 percent, positively rated securities exhibit a price change
rate of 11 percent vs a lower rate of 3.6 percent for negatively rated securities.
This preliminary analysis sheds some light on the reaction of investors on the Tunisian
stock market after the forecast earnings revision, evaluated through the change in the
securities prices. A positive revision generally corresponds to a buying behavior of
securities by the investors, which generates an additional abnormal return. However, a
negative revision generally corresponds to a sales behavior, which results in a lower return
on securities. The importance of the revision variable in the analysis of investor behavior
and changes in market prices must be complemented by a further investigation using
econometric techniques.

4. Investor reaction to the forecast earnings’ revision: parametrical analysis

In this section, we conduct parametrical tests to detect the existence of abnormal return
generated by the analysts’ revisions of the forecasted earnings. First, we conduct a portfolio
study in order to understand the reaction of investor and the stock prices change following
forecast revisions. Portfolio analysis will be supplemented by a second empirical
investigation based on the panel data to quantify the empirical effect of the forecast revision
on abnormal return of securities.

4.1 Securities performance after earnings’ forecast revisions: a portfolio study

This portfolio study analyzes the reaction of investors on the Tunisian stock market,
dealing with the reaction of stock prices following the revision of forecast earnings. In order
to test the effect of the earning revision on market investors and the performance of
securities, we break down our sample into four portfolios according to the sign given by the
revision and earnings variables (REV and EPS). This decomposition allows us to determine
RBF Evolution of prices
11,2 Sign of revisions following the Average of prices Average of prices
Companies realized and forecast earnings before revisions after revisions Change (in %)

Amen Bank Negative 30.44 29.26 −3.876

ATB Positive 4.12 4.32 4.854
BT Positive 9.05 9.59 5.967
176 BH Positive 10.34 11.90 15.087
UBCI Positive 18.01 18.23 1.222
BIAT Positive 61.36 63.88 4.107
Attijari Bank Positive 16.29 17.32 6.323
BNA Positive 7.60 8.06 6.053
UIB Positive 14.15 15.48 9.399
STB Positive 5.12 5.49 7.227
BTE Positive 20.01 23.70 18.441
ASTREE Negative 12.47 30.44 144.106
STAR Negative 120.52 112.89 −6.331
ICF Negative 17.58 21.27 20.990
Air Liquide Negative 242.85 202.70 −16.533
Alkimia Positive 30.62 25.17 −17.799
SFBT Positive 14.04 14.93 6.339
Tuninvest Positive 3.74 4.61 23.262
PLAC.TSIE Negative 3.76 4.08 8.511
SPDIT-SICAF Positive 5.56 6.78 21.942
TL Negative 20.05 17.90 −10.723
CIL Negative 13.31 12.71 −4.508
ATL Negative 2.39 2.66 11.297
Sotetel Negative 3.45 4.44 28.696
Tunisair Negative 1.05 1.26 20.000
Monoprix Positive 24.08 25.23 4.776
SIMPAR Positive 56.21 60.03 6.796
Sotuver Positive 6.72 6.96 3.571
SIAME Positive 2.85 2.83 −0.702
SOTUMAG Positive 1.61 1.82 13.043
MG Negative 21.84 22.04 0.916
Electrostar Positive 9.42 9.57 1.592
SOTRAPIL Negative 8.59 9.91 15.367
SIPHAT Positive 4.05 4.40 8.642
STEQ Positive 1.58 2.10 32.911
Somocer Positive 2.84 3.26 14.789
ASSAD Negative 7.01 8.06 14.979
GIF-FILTER Positive 4.13 4.49 8.717
SITS Positive 2.42 2.55 5.372
WL Positive 12.43 13.89 11.746
ESSOUKNA Negative 7.76 7.21 −7.088
ADWYA Positive 7.04 8.51 20.881
TPR Positive 4.38 4.63 5.708
POULINA GPH Positive 5.24 5.66 8.015
ARTES Positive 6.91 7.59 9.841
SOPAT Negative 1.89 1.96 3.704
CIM.BIZERTE Positive 6.18 6.45 4.369
SERVICOM Positive 22.63 23.73 4.861
SALIM Positive 10.64 18.89 77.538
TUNISIE RE Positive 9.19 10.33 12.405
ENNAKL Negative 9.64 9.42 −2.282
ML Positive 4.10 4.79 16.829
Table IV. TELNET Positive 5.36 5.64 5.224
Earnings forecast Attijari Lease Positive 18.15 21.56 18.788
revisions and changes Hexabyte Negative 8.4 8.32 −0.952
in share prices in 2013, NBL Negative 6.73 6.24 −7.281
56 listed companies Source: Authors
 12 Evolution in
10 the Tunisian
stock market
8

4 177
2

0 Figure 2.
Positive REV Negative REV Market securities Change in revised
securities securities stock prices (in
percent) (year 2013)
Source: Authors

and compare the abnormal performance of securities for each portfolio after the revision of
earning forecasts.
4.1.1 The model. The methodology is based on the market model, initially proposed by
Fama et al. (1969). The theoretical profitability of securities is linked to the market
profitability through a coefficient of proportionality β, specific to each security, as follows:
Rit ¼ aþb Ln Rmt þeit ; (5)
where E(εit) ¼ 0 and Varðeit Þ ¼ @2e1 :
Rit and Rmt are the returns for the period (t) of the asset (i) and the market portfolio,
respectively. Ln designs the natural logarithm. β is the regression coefficient that measures
the market profitability of the security (i), and α is the intercept:
CovðRi ; Rm Þ
bi ¼ : (6)
d2 ðRm Þ

The coefficient β of each security is estimated over the entire period without weighting of
returns by market capitalization. In this study, the calculation of yields is determined as follows:


Pt
Rit ¼ Log ; (7)
P t1

where Pt is the price of the asset at time (t) and Log denotes the logarithmic function.
Abnormal profitability is defined as the difference between the observed and the
theoretical profitability. The latter represents the profitability that should have taken place
in the absence of events. To do this, we use a market model, which allows us to estimate
the monthly return of each security in the sample, and to calculate abnormal profitability.
The abnormal profitability of each security (i) is calculated as the difference between the
observed daily yield of the security (i) and the expected daily yield:
_ _ 
ARi;t ¼ Ri;t R i;t ¼ E R i (8)

To judge the performance of a security as abnormal, we need the adjustment of the return
observed on the security after the event with the expected return of the security previously
RBF estimated by the market model. We then calculate the average abnormal returns of the
11,2 portfolios for each day as follows:
X
n  
ARt;moyen ¼ 1=nt ARi;t : (9)
i¼1

178 We adopt the methodology for calculating abnormal returns, which refers to the cumulative
average residual (CAR) method, as pointed out above. The CAR is calculated by cumulating
the average abnormal returns of each portfolio over the time horizon to be studied. It is
formalized by the following equation:
X
T T X
X n  
CART;moyen ¼ ARt;moyen ¼ 1=nt ARi;t : (10)
t¼1 t¼1 i¼1

Choosing the average CAR to measure the average abnormal performance of a sample of
firms leads us to define the following two research hypotheses:
H 0 : CaRT;moyen ¼ 0

H 1 : CaRT;moyen a 0:

If the market is efficient in the semi-strong form, the announcement should not have a
significant influence on stock prices, which implies that the observed profitability of the Rit
share is equal to the expected profitability according to the market model. In order to
calculate the normal yield, it is necessary to first estimate the coefficient of sensitivity β by a
time series regression.
4.1.2 Results of the market model. Based on the market model presented in Equation (5),
we estimate the 41 firm securities of our sample. The main results are summarized in
Table V. Only results exhibiting significant estimates of the coefficient β are reported.
Results not statistically significant are systematically eliminated from the remainder of our
portfolio study.
The coefficient β is a measure of the security sensitivity to market fluctuations. It is
therefore used to evaluate the specific risk of financial securities. The higher the value of
β coefficient and the more the promise of stock profitability must be strong to offset the
additional volatility of the security and the risk it causes. Our results show β values less
than 1, which indicates that securities in Tunisian stock market are defensive and they
mitigate market fluctuations. When the β estimates take negative values, this means that
the fluctuations of the security are inverse to that of the market. This finding suggests that
securities react by reversing the orientation of its reference market (Tunindex). This can be
interpreted as follows: if the β is positive by 5.21 percent for Amen Bank securities for
example, its value increases by 5.21 percent when its market gains 1 percent.
The problem of residual autocorrelation is corrected with the generalized least squares
method. The White test is also used to correct the problem of self-correlation of residual
variances (heteroscedasticity test). This has significantly improved Durbin Watson’s
statistics, which show values close to 2 for all estimated securities. The relatively low values
of R2 are justified by the single factor market model, where the return of an asset is
explained only by the market portfolio return variable (Tunindex), excluding other
controlling variables.
Titres Obs. R2 DW
Evolution in
the Tunisian
Amen Bank 362 −0.0003 (0.0002) 0.5216*** (0.1949) 0.0959 2.0596 stock market
BT 362 −0.0007 (0.0002) 0.5333*** (0.1053) 0.0664 2.1771
BH 362 −0.0002 (0.0002) 0.2814* (0.1536) 0.0651 2.0031
BNA 362 −0.0001 (0.0003) 0.3406** (0.1598) 0.0123 2.3465
ICF 362 0.0002 (0.0009) 0.2671** (0.2277) 0.0106 1.8086
Air Liquide 362 0.0002 (0.0004) 0.5411*** (0.1622) 0.0186 1.7517 179
SFBT 363 0.0002 (0.0003) 0.3222*** (0.1226) 0.0101 2.1204
Tuninvest 363 0.0003** (0.0004) −0.1932* (0.2268) 0.0199 2.1047
PLAC.TSIE 362 0.0000 (0.0002) −0.0247* (0.0931) 0.0271 2.0048
CIL 362 −0.0002 (0.0002) 0.2753** (0.1318) 0.1383 2.0808
ATL 363 −0.0005 (0.0004) 0.4048* (0.2359) 0.0804 2.4486
Monoprix 363 −0.0000 (0.0003) 0.4692*** (0.1739) 0.0152 2.1988
SIMPAR 362 0.0002 (0.0003) 0.3341* (0.1845) 0.0897 2.5256
SOTUMAG 363 0.0006 (0.0004) 0.5004** (0.2351) 0.0988 2.0782
Electrostar 362 0.0017** (0.0009) 0.6618** (0.3511) 0.0955 1.9371
SIPHAT 363 −0.0005* (0.0003) 0.2807** (0.1476) 0.0986 2.2362
STEQ 363 0.0002 (0.0002) −0.2688** (0.1292) 0.0250 1.9922
ASSAD 363 −0.0003* (0.0002) 0.4040*** (0.1045) 0.0269 2.5103
GIF-FILTER 363 −0.0011* (0.0006) 0.6085* (0.3376) 0.0169 1.9882
SITS 362 −0.0004 (0.0004) 1.0494*** (0.2350) 0.0683 2.4707
ADWYA 363 −0.0006 (0.0003) 0.3458* (0.1958) 0.0130 2.0105
POULINA GP H 363 −0.0002 (0.0003) 0.6772*** (0.1480) 0.0548 2.4720
TUNISIE RE 363 −0.0004** (0.0002) 0.3125** (0.1439) 0.0889 2.0478
ENNAKL 362 0.0002 (0.0004) 0.5125*** (0.1923) 0.0192 2.2697
TELNET 363 −0.0003 (0.0003) 0.3914** (0.1700) 0.0143 2.5459
Attijari Lease 363 0.0005 (0.0003) 0.3396* (0.1813) 0.0956 2.1843
Hexabyte 363 −0.0006* (0.0004) 0.3865* (0.2249) 0.0742 2.3793
NBL 363 −0.0004* (0.0004) 0.5373*** (0.2194) 0.0162 2.3692
ARTES 363 −0.0001 (0.0004) 0.4638** (0.2233) 0.0117 2.1490
Attijari Bank 362 −0.0001 (0.0002) 0.6069*** (0.1349) 0.0532 2.6082
BIAT 362 −0.0001 (0.0003) 0.3523** (0.1531) 0.0143 2.4704
WL 362 −0.0003* (0.0004) 0.3319** (0.1852) 0.0949 2.0433
ESSOUKNA 362 0.0001 (0.0004) 0.3099* (0.1794) 0.0518 1.9971
Somocer 362 −0.0003 (0.0005) 0.7936*** (0.2526) 0.0239 2.1375
Sotetel 362 −0.0002 (0.0004) 0.4341* (0.2437) 0.0443 2.0258
Sotuver 363 −0.0002 (0.0005) 0.4548* (0.2521) 0.0893 2.0913
STAR 362 0.0003 (0.0002) 0.3449*** (0.1300) 0.0131 2.5963
STB 362 −0.0005 (0.0004) 0.4958*** (0.1937) 0.0168 2.2742
TL 362 −0.0008 (0.0002) 0.3208** (0.1571) 0.0891 2.6897
TPR 362 −0.0001* (0.0003) 0.4177*** (0.1422) 0.0185 2.3780 Table V.
UBCI 362 −0.0008 (0.0003) 0.2626* (0.1406) 0.0624 2.2972 Summary of estimates
Notes: The values in parentheses represent the standard errors of the estimators. *,**,***Significant at 10, 5 results of the
and 1 percent levels, respectively market model

4.1.3 Determination of portfolios to be studied. After estimating the returns of securities in

our sample, we use a methodology similar to that adopted by Kaestner (2005). This
methodology consists in distinguishing between the portfolios to be studied as a function of
the given sign of both the REV and the EPS variables, and then analyzing the evolution of
the abnormal returns over a period of 30 days.
The first step is to decompose our sample of 41 firms into two portfolios, according to the
sign of the revision (variable REV). Securities with a positive revision are grouped in the same
portfolio, while securities with a negative revision are classified in another portfolio.
The second step consists in splitting each of these two portfolios obtained according to the
evolution of the earnings in 2013 (variable ΔEPS). Companies with positive earnings changes
RBF are classified in the same portfolio, and firms with lower earnings than in the previous half of
11,2 the year will be grouped into a second portfolio.
In total, we broke our sample into four securities portfolios, according to the sign taken
by the two variables REV and EPS. Table VI describes these four portfolios such follows:
(1) REV positive and EPS positive (Portfolio 1);
(2) REV negative and EPS positive (Portfolio 2);
180
(3) REV positive and EPS negative (Portfolio 3); and
(4) REV negative and EPS negative (Portfolio 4).
4.1.4 Results of the portfolio study. The determination of the abnormal returns in these four
securities portfolios allows us to calculate the mean of the abnormal returns per date in the
event window for each portfolio. Similarly to the previous portfolio study focusing on the
variable SUE, it was also proposed to study investors’ under-reaction on six windows of
different events, each composed of five days. Table VII summarizes the results of

Portfolio 1 Portfolio 2
ΔEPS (+) and REV (+) ΔEPS (+) and REV (−)
Air Liquide BT
Sotetel PLACE-TUNISIE
SIMPAR ATL
SIPHAT BIAT
ASSAD SITS
GIF-FILTER ENNAKL
ADWYA TELNET
POULINA ARTES
TUNISIE RE ESSOUKNA
WL SFBT
STB STEG
Portfolio 3 Portfolio 4
ΔEPS (−) and REV (+) ΔEPS (−) and REV (−)
BH Amen Bank
BNA ICF
CIL TUNI-INVEST
Monoprix Attijari Lease
SOTUMAG UBCI
Hexabyte Tunisie Leasing
Attijari Bank STAR
Table VI. Sotuver Electrostar
Portfolios TPR NBL
under analysis Somocer

Δ EPS W 0 Δ EPS o 0
REV W 0 REV o 0 REV W 0 REV o 0
Portfolio 1 Portfolio 2 Portfolio 3 Portfolio 4
Interval of time CMAR CMAR CMAR CMAR

[0, 5] 0.0241 0.0119 0.0107 −0.0118

[0, 10] 0.0309 0.0055 0.0100 −0.0161
Table VII. [0, 15] 0.0449 0.0167 0.0101 −0.0200
Evolution of abnormal [0, 20] 0.0460 0.0238 0.0144 −0.0283
returns over a [0, 25] 0.0465 0.0213 0.0118 −0.0252
period of 30 days [0, 30] 0.0491 0.0184 0.0115 −0.0285
cumulative mean abnormal returns (CMARs) for our sample. Our hypothesis is that if Evolution in
investor under-react to the revision of earning per share forecasts, then the positive revision the Tunisian
portfolios (REV W 0) will perform better than negative revision ones (REV o 0). Therefore, stock market
our study is based on the comparison of abnormal profitability observed ex post, after a
surprise of positive or negative announcement following the revision of earnings forecasts.
Results in Table VII seem to validate the earnings announcement effect following the
forecasts revision (REV ) as well as the under-reaction of investors on the Tunisian stock 181
market. Indeed, there is a difference of abnormal returns between the portfolios with
positives revisions on the one hand and those with negatives revisions on the other. Among
the four portfolios studied, returns from portfolio 1 with positives values of REV and EPS
are the highest ones. Results indicate a positive reaction during the five days following
the earnings announcement which increases during the following 30 days. However, the
abnormal returns of portfolio 4 are negatives and are the lowest in our sample whatever the
window of event studied.
Table VIII reports the daily mean abnormal yields for our four portfolios studied. Results
show that portfolios with positive REV and ΔEPS generally have higher mean abnormal

Δ EPS W 0 Δ EPS o 0
REV W 0 REV o 0 REV W 0 REV o 0
Portfolio 1 Portfolio 2 Portfolio 3 Portfolio 4
Day MAR MAR MAR MAR p-value

0 0.0062 −0.0017 −0.0057 −0.0074 0.0949*

1 0.0036 0.0059 0.0025 −0.0023 0.0061***
2 0.0129 −0.0001 −0.0027 −0.0067 0.0148**
3 0.0037 0.0015 0.0027 −0.0019 0.0086***
4 0.0026 −0.0026 0.0077 0.0009 0.0505**
5 0.0018 0.0070 0.0073 0.0009 0.0209**
6 −0.0025 −0.0001 −0.0030 0.0005 0.0492**
7 −0.0023 −0.0003 −0.0024 −0.0061 0.0001***
8 −0.0003 −0.0013 0.0004 0.0034 0.0002***
9 −0.0019 −0.0001 0.0034 −0.0004 0.0000***
10 0.0003 −0.0028 −0.0004 −0.0018 0.0427**
11 0.0064 0.0075 0.0000 −0.0017 0.2316
12 0.0075 0.0011 −0.0015 −0.0032 0.0053***
13 0.0024 0.0028 0.0002 −0.0021 0.0250**
14 0.0002 −0.0008 0.0013 0.0036 0.0004***
15 0.0042 0.0006 0.0001 −0.0005 0.5313
16 0.0012 0.0002 0.0027 −0.0017 0.0025***
17 −0.0003 0.0010 0.0015 −0.0015 0.6687
18 0.0009 0.0029 0.0020 −0.0059 0.7123
19 0.0058 0.0034 0.0012 0.0025 0.0689*
20 −0.0066 −0.0003 −0.0031 −0.0017 0.0113**
21 0.0013 −0.0010 −0.0019 −0.0003 0.2838
22 −0.0016 −0.0003 0.0002 −0.0029 0.0757*
23 0.0027 0.0021 −0.0012 −0.0008 0.0068***
24 −0.0027 −0.0024 0.0000 0.0044 0.0875*
25 0.0009 −0.0009 0.0002 0.0026 0.8804
26 −0.0022 −0.0007 −0.0020 −0.0004 0.1023*
27 0.0090 0.0020 −0.0008 −0.0008 0.0833*
28 −0.0027 0.0008 0.0019 −0.0023 0.0000***
29 0.0014 −0.0032 0.0006 0.0020 0.6801 Table VIII.
30 0.0029 −0.0017 0.0000 −0.0018 0.0273** Student’s test of mean
Notes: *,**,***Significant at 10, 5 and 1 percent levels, respectively abnormal returns
RBF returns (MAR) than those with negative REV and ΔEPS. We conclude that securities with a
11,2 high earning forecast revision outperform the low earning forecast revision ones. To test the
significance of results, the Student test was performed on daily MAR. Test results are
summarized in the last column of Table VIII. The Student test indicates that the mean
abnormal yields are generally statistically significant.
On the other hand, it can be seen that portfolio 3 exhibiting the same sign of earning
182 revision as portfolio 1, has achieved MAR that are generally lower than the latter. This
result is explained by the negative evolution of EPS and reflects the investors’ anchor to
previous earnings which are lower than those realized during the second half of 2013. This
market reaction is the consequence of result announcement. Similarly for portfolio 2 and
4 which exhibited a negative earning revision have generally achieved higher MAR. This
result can be explained by the positive evolution of EPS and reflects the over-reaction of
investors. In both cases, investors have not adjusted their beliefs to the new information.
4.1.5 Graphical presentation of results. Figure 3 illustrates our results. It seems to
confirm our first observation that investors under-react to bad news and over-react to good
news. Graphically, the cumulative abnormal returns of the positive earnings revision
portfolios are significantly higher than those of the negatively revised portfolios.
This finding shows that the information provided by the revision of earnings forecasts is
not immediately included in the price, but there is an anchoring bias in relation to the past
earnings, as well as on the investor time of response to the new information provided by the
market. Abnormal returns are thus observed between the positive and negative earnings
revision portfolios. This result corroborates the studies of Jacquillat et al. (1989) and Grandin
(1995) on the French stock market, and the work of Liu et al. (2003) on the English market
namely from the market to earning revision. This second test shows a persistence of the result
announcement effect following the revision of earnings forecasts on the Tunisian stock market.

4.2 The empirical effect of earnings forecast revisions on return securities

This second empirical investigation completes the previous portfolio study. It attempts to
estimate the effect of the revision of earnings forecasts by financial analysts on the
abnormal profitability of securities in the Tunisian stock market. Our theoretical hypothesis
predicts that investors under psychological biases react to the revision effect of the forecast
earnings by an abnormal variation of the securities prices. The analysis draws on the work

0.05

0.04

0.03

0.02

0.01

0
d + 30
d + 28
d + 26
d + 24
d + 22
d + 20
d + 18
d+16
d+14
d+12
d+10
d+8
d+6
d+4
d+2
d d–2
d–4

–24
d – 26
d – 28
d – 30
d–6 d

20 d
– 22 d
–8 d –
10 d –
12 d –
14 d –
16 d –
18 d –

Figure 3. –0.01
Graphique comparatif
des CAR à la révision
des bénéfices –0.02
CAR of REV (+) securities CAR of REV (–) securities
of Cornell and Landsman (1989), Beaver et al. (2008), and also combines variables to better Evolution in
understand this effect. the Tunisian
4.2.1 The effect of earnings forecast revision on securities return: full period estimates. stock market
A first set of estimates of the earnings forecast revision effect on securities abnormal return
covers the full period of analysis, which extends from the first half of 2010 to the second half
of 2017. Our analysis is conducted in panel data.
The basic model is first tested. Our objective is to determine the empirical effect of the 183
revision of the forecast earnings as measured by the variable REV, on the abnormal return
of the securities as measured by the variable CAR. Two control variables are used, namely
the SUE forecast error variable and the EPS half-yearly earnings change variable.
The basic model is as follows:

CARit ¼ ait þbREVit þgSUEit þdDEPSit þeit ; (11)

where CAR is the cumulative average abnormal return of the security (i) in the semester (t),
α a constant and ε the terms of errors.
Table IX presents the results of the panel data model (1) regression estimated over the
full period from 2010 to 2017. The estimated coefficients are statistically significant for the
mostly of the explanatory variables. This finding shows that each of these variables
provides information to the market, which is not provided by others. The regression results
show that the estimated coefficient of the REV variable is positive and significant at a
threshold of at least 95 percent. This result validates our theoretical assumption; any
abnormal price variation is related to a similar revision by the market of the forecast
earnings, since investors react to this revision effect by a purchase behavior of securities.
The analysts’ revision is actually used as a basis for these price developments and abnormal
return of the securities. These results mostly confirm those find by the empirical literature.
In addition, results indicate the relatively big size of the SUE forecast error coefficient,
which is statistically significant at a 99 percent threshold in all specifications. This is
explained by the analysts’ revision that does not fully integrate the forecast errors; hence
this has an important explanatory power on the abnormal return of securities. On the other
hand, the lower and less significant coefficients obtained for the variable EPS, prove that
this latter is more considered by the analysts in their revisions, and subsequently its effect
on the abnormal return of securities is lower.
Second we conduct regressions involving interactions of the REV variable with the
remainder variables. We seek through these tests to detect the combined empirical effect of
the earnings revision and the change in the realized earnings in one side, and the forecast
error in the other, on the abnormal return of securities.
There are two interaction specifications for the REV variable. The first specification
regresses the revision variable combined with the forecast error (REV×SUE) by taking the
change in the realized earnings as a control variable. The second specification regresses the

(1) (2) (3) (4) (5)

Intercept 0.0047 (0.0063) −0.0045** (0.0023) 0.0024 (0.0025) 0.0016*** (0.0001) 0.0026 (0.0027)
REV 0.0021*** (0.0009) 0.0023*** (0.0018) 0.0007** (0.0010) 0.0008*** (0.0011)
SUE 0.0694*** (0.0372) 0.0630*** (0.0352) 0.0191*** (0.0207) Table IX.
EPS 0.0011*** (0.0004) 0.0018** (0.0010) 0.0011** (0.0004) Results of the basic
R2 (%) 3.37 7.79 4.46 7.84 6.93 model estimates full
n 646 645 645 645 645 period (2010
Notes: **,***Significant at 5 and 1 percent levels, respectively S1–2017 S2)
RBF variable of the revision combined with the variation of the realized EPS (REV×ΔEPS) by
11,2 taking the forecast error as a control variable:
Specification 1: CARit ¼ ait þ bðREV  SUEÞit þdDEPSit þeit ; (12)

Specification 2: CARit ¼ ait þ bðREV  DEPSÞit þdSUEit þeit : (13)

184
The estimates conducted for these two specifications over the full analysis period
(2010–2017) are reported in Table X. Results show that the interactive variables are positive
and statistically significant, as well as the controlling variables.
According to results estimates of the specification (1) (Equation (12)), the effect of a positive
interaction of earnings revision (REV) with unexpected earnings (SUE) on the abnormal return of
securities is also positive, approximated at 4.5 percent and statistically significant at a threshold
of 99 percent. Similarly, following to results estimates of the specification (2) (Equation (13)),
the effect of a positive interaction of forecast revision with change in realized earnings (ΔEPS) is
also positive, estimated at 0.2 percent and statistically significant at 99 percent. From these
results, we deduced that the effect of the forecast earnings revision on the abnormal return of
securities becomes more important when this forecast revision is combined with an unexpected
earnings and/or a high change in realized earnings. Moreover, this effect on the abnormal return
of securities exhibits the same positive or negative sign as that taken by the two interaction
variables. These results confirm the conclusions of our previous portfolio study.
4.2.2 The effect of earnings forecast revision on securities return: annual estimates.
A second set of estimates of the earnings forecast revision’s effect on the abnormal return of
securities is conducted by year. The availability of data on the Tunisian stock market allows
us to perform regressions over eight years from 2010 to 2017.
First we test the basic model previously presented (Equation (11)) by year. The purpose
is to check the robustness of the effect of the forecast earnings revision on the abnormal
return of securities for each year. In total, 16 annual regressions are tested using biannual
data in order to widen the number of observations as much as possible.
The tests’ results are reported in Table XI. The coefficients obtained by the annual
estimates keep their positive sign as well as their high level of statistical significance for the
most years of regressions, which corroborate the full period estimates. As expected, the
controlling variables are positively and significantly correlated to the abnormal return of
securities. This globally confirms that the effect of revision of forecast earnings on the
abnormal return of securities is robust to the annual analysis.
Lastly we re-estimate with annual regressions, the specifications (1) and (2) (Equations
(12)–(13)) previously exposed and measuring the interactions of the REV variable.
The purpose is also to check the robustness of the interaction regression results conducted
over the full period.

Specification 1 Specification 2

Intercept 0.0014 (0.0025) 0.0020** (0.0001)

REV×SUE 0.0045*** (0.0015)
REV×ΔEPS 0.0002*** (0.0003)
Table X. EPS 0.0015*** (0.0004)
Results of the REV
SUE 0.0644*** (0.0360)
interaction 2
specifications’ R (%) 5.10 7.80
estimates full period n 645 645
(2010 S1–2017 S2) Notes: **,***Significant at 5 and 1 percent levels, respectively
Table XII presents tests’ results over 16 years from 2010 to 2017. Results show that the Evolution in
estimated coefficient of the REV variable interaction with the variables (SUE) and (ΔEPS) is the Tunisian
strongly positive and statistically significant. This effect is more pronounced in the first stock market
specification for the all regressions years, which highlights the importance of the forecast
error in the evolution of price securities. Results thus confirm the favorable effect exerted by
the interaction variable on the abnormal return of securities regardless of the period of
study, which globally validate our first findings. 185

5. Conclusion
This paper examines the impact of forecast earnings revision on the evolution of securities
prices. Analysis is conducted in three exhaustive studies for the case of Tunisian stock
market. The first nonparametric study provides a descriptive reconciliation between two
variables, revised earnings forecast and change in stock returns. Results highlight a
significant influence of forecast earnings revision by financial analysts on market prices.
The second study which consists of a portfolio analysis verifies that investors are
under-reacting to the revision of the EPS forecast, and that as a result, the positive-revision
portfolios will have higher returns than those recorded on the negative-revision ones.
Finally, the latest study which leads to different regressions and robustness tests, confirms
in a statistically significant way the link between the forecast earnings revision effect and
the abnormal return on market securities. This abnormal profitability is positive and the
more important when it is combined with an unexpected earnings and/or a variation of the
realized earnings that are equally important and positive.
The evidence validates our fundamental theoretical hypothesis according to which the
psychological bias resulting from the effect of forecast earnings revision is related to the
abnormal profitability of securities. We conclude the importance of the revision influence on

C REV SUE EPS R2 (%) n

Year 2010 −0.0301*** (0.0131) 0.0127*** (0.0044) 0.0291*** (0.0069) 0.0137*** (0.0004) 82.93 76
Year 2011 0.0319*** (0.0010) 0.0047*** (0.0030) 1.2333*** (0.0004) 0.0032*** (0.0013) 98.79 79
Year 2012 0.0449 (0.0091) 0.0112*** (0.0016) 0.0916*** (0.0178) 0.0026 (0.0065) 72.63 81
Year 2013 −0.0041 (0.0009) 0.0003*** (0.0010) 0.0402** (0.0176) 0.0013 (0.0014) 39.60 82
Year 2014 0.0176*** (0.0058) 0.0013*** (0.0006) 0.3029*** (0.0703) 0.0049*** (0.0143) 49.16 81
Year 2015 −0.0023 (0.0047) 0.0040*** (0.0010) 0.2801*** (0.0364) 0.0078*** (0.0007) 36.63 82 Table XI.
Year 2016 0.0018*** (0.0004) 0.0071*** (0.0013) 0.1513*** (0.0334) 0.0021*** (0.0003) 37.60 82 Results of the
Year 2017 0.0047 (0.0017) 0.0149*** (0.0059) 0.1215** (0.2419) 0.1019** (0.0436) 52.11 82 basic model
Notes: **,***Significant at 5 and 1 percent levels, respectively estimates by year

Specification 1 Specification 2 R2
(REV×SUE) (REV× EPS) (%) n

Year 2010 0.0133*** (0.0009) 0.0030** (0.0010) 42.40 76

Year 2011 0.4033*** (0.0556) 0.0050*** (0.0006) 20.56 76
Year 2012 0.0795*** (0.0242) 0.0022*** (0.0007) 67.80 81
Year 2013 0.0102*** (0.0031) 0.0006*** (0.0002) 9.922 82
Year 2014 0.0950*** (0.0033) 0.0036*** (0.0011) 16.80 81
Year 2015 0.0815*** (0.0125) 0.0055*** (0.0006) 12.89 82 Table XII.
Year 2016 0.0359*** (0.0060) 0.0032*** (0.0002) 21.91 82 Results of the annual
Year 2017 0.2966*** (0.0595) 0.0057** (0.0036) 75.29 82 REV interaction
Notes: **,***Significant at 5 and 1 percent levels, respectively specification estimates
RBF the investors’ behavior on one hand, and the informational content of analysts’ forecasts and
11,2 the biases which they can lead on the other hand. These conclusions make it possible to put
forward general recommendations on the Tunisian stock market. Indeed, financial analysts
are called upon to improve the quality of their forecasts and subsequently that of their
earnings revisions, since the reaction of investors in the market is highly dependent on them
and is reflected in the securities performance. This is crucial to reduce forecast errors and
186 better reflect them in revisions.
Globally, our empirical illustrations largely validate the findings of behavioral models
particularly that of Kormendi and Lippe (1987), Cornell and Landsman (1989), Beaver et al.
(2008) which states that investors under psychological bias, react to the effect of forecast
earnings revision by an abnormal variation in stock prices.

References
Abdel-khalik, A.R. and Ajinkya, B.B. (1982), “Returns to informational advantages: the case of
analysts’ forecasts revisions”, The Accounting Review, Vol. 27 No. 4, pp. 661-680.
Ball, R. and Brown, P. (1968), “An empirical evaluation of accounting income numbers”, Journal of
Accounting Research, Vol. 6 No. 2, pp. 159-178.
Barber, B., Lehavy, R., McNichols, M. and Trueman, B. (2001), “Can investors profit from the prophets?
Security analyst recommendations and stock returns”, Journal of Finance, Vol. 56 No. 2,
pp. 531-563.
Beaver, W., Cornell, B., Landsman, W. and Stubben, S. (2008), “The impact of analysts’ forecast errors
and forecast revisions on stock prices”, Journal of Business Finance and Accounting, Vol. 35
Nos 5/6, pp. 709-740.
Bonner, S.E., Hugon, A. and Walther, B.R. (2007), “Investor reaction to celebrity analysts: the case of
earnings forecast revisions”, Journal of Accounting Research, Vol. 45 No. 3, pp. 481-513.
Bradley, D., Gokkaya, S. and Liu, X.I. (2016), “Before an analyst becomes an analyst: does industry
experience matter?”, Journal of Finance, Vol. 72 No. 2, pp. 751-792.
Brown, L. and Huang, K. (2013), “Recommendation-forecast consistency and earnings forecast quality”,
Accounting Horizons, Vol. 27 No. 3, pp. 451-467.
Capstaff, J., Paudyal, K. and Rees, W. (1995), “The accuracy and rationality of UK analysts’ forecasts of
earnings”, Journal of Business Finance and Accounting, Vol. 22 No. 1, pp. 69-87.
Capstaff, J., Paudyal, K. and Rees, W. (2000), “Revisions of earnings forecasts and security returns:
evidence from three countries”, working paper, University of Glasgow, Glasgow.
Cornell, B. and Landsman, W. (1989), “Security price response to quarterly earnings announcements
and analysts’ forecast revisions”, The Accounting Review, Vol. 64 No. 4, pp. 680-692.
Dimson, E. and Marsh, P. (1984), “An analysis of brokers’ and analysts’ unpublished forecasts of UK
stock returns”, Journal of Finance, Vol. 39 No. 5, pp. 1257-1292.
Elton, E., Gruber, M. and Gultekin, M. (1981), “Expectations and share prices”, Management Science,
Vol. 27 No. 9, pp. 975-987.
Fama, E., Fisher, L., Jensen, M. and Roll, R. (1969), “The adjustment of stock prices to new information”,
International Economic Review, Vol. 10 No. 1, pp. 1-21.
Fang, L. and Yasuda, A. (2014), “Are stars’ opinions worth more? The relation between analyst
reputation and recommendation values”, Journal of Financial Services Research, Vol. 46 No. 3,
pp. 235-269.
Givoly, D. and Lakonishok, J. (1979), “The information content of financial analysts’ forecasts of
earnings: some evidence on semi-strong inefficiency”, Journal of Accounting and Economics,
Vol. 1 No. 3, pp. 165-185.
Givoly, D. and Lakonishok, J. (1980), “Financial analysts’ forecast of earnings: the value to investors”,
Journal of Banking and Finance, Vol. 4 No. 3, pp. 221-233.
Gleason, C. and Lee, C. (2003), “Analyst forecast revisions and market price discovery”, The Accounting Evolution in
Review, Vol. 78 No. 1, pp. 193-225. the Tunisian
Grandin, P. (1995), Production d’Informations Privées et Gestion de Portefeuille, Collection Finance, stock market
PUF, Paris.
Hall, J.L. and Tacon, P.B. (2010), “Forecast accuracy and stock recommendations”, Journal of
Contemporary Accounting & Economics, Vol. 6 No. 1, pp. 18-33.
Jacquillat, B., Roger, P. and Grandin, P. (1989), “Avantage Informationnel d’un Consensus de Marché et 187
Rentabilités Boursières”, No. 8905, Cahier de recherches du CEREG, Paris.
Kaestner, M. (2005), Prévisions de résultat et réactions: Etude de deux sous-réactions sous l’angle
du biais d’ancrage, Montpellier University Seminar, Montpellier, September.
Kormendi, R. and Lippe, R. (1987), “Earnings innovations, earnings persistence and stock returns”,
Journal of Business, Vol. 60 No. 3, pp. 323-345.
Levasseur, M., L’her, J.F. and Suret, J.M. (2001), “Anticipations Hétérogènes et Rendements Boursiers:
Le Cas du Marché Français”, working paper, Cornell University, New York, NY.
L’Her, J.F. and Suret, J.M. (1991), “The reaction of Canadian securities to revisions of earnings
forecasts”, Contemporary Accounting Research, Vol. 7 No. 2, pp. 378-406.
Liu, W., Strong, N. and Xu, X. (2003), “Post-earnings-announcement drift in the UK”, European
Financial Management, Vol. 9 No. 1, pp. 89-116.
Park, C. and Stice, E. (2000), “Analyst forecasting ability and the stock price reaction to forecast
revisions”, Review of Accounting Studies, Vol. 5 No. 3, pp. 259-272.
Ramnath, S., Rock, S. and Shane, P. (2008), “The financial analyst forecasting literature: a taxonomy
with suggestions for further research”, International Journal of Forecasting, Vol. 24 No. 1,
pp. 34-75.
Simon, A. (2014), “An analysis of persistence in analyst’s relative forecast accuracy”, Applied Financial
Economics, Vol. 24 No. 2, pp. 107-120.
Stickel, S.E. (1991), “Common stock returns surrounding earnings forecast revisions: more puzzling
evidence”, The Accounting Review, Vol. 66 No. 2, pp. 402-416.

Corresponding author
Ahmed Bouteska can be contacted at: ahmedcbouteska@gmail.com

For instructions on how to order reprints of this article, please visit our website:
www.emeraldgrouppublishing.com/licensing/reprints.htm
Or contact us for further details: permissions@emeraldinsight.com