- On average, PRD is no longer persistently different from zero.
- Investors are no longer underreacting to revisions of earnings forecasts.
- There’s no longer support for the hypothesis that analysts typically supply new information that correctly picks stocks for the long run.
- There also was no significant association with extreme revisions, a commonly used proxy for better-informed analysts.
- PRD has broadly vanished because of a general decline in transaction costs, pushed down to historic lows by decimalization, the expanded use of supercomputers and algorithmic trading. The disappearance of PRD coincides with notable reductions in transaction costs that have attracted profit-taking arbitrageurs to PRD.
- Consistent with the hypothesis that high transaction costs allow anomalies to persist, there is evidence of statistically significant average PRD in the lowest decile (the bottom 10% of the revisions) when ranking by trading volume. Stocks exhibiting PRD tended to be very low priced, have limited trading volume and are more likely to be listed on the Nasdaq, thus having higher trading costs (median quoted bid-ask spreads are larger in the supercomputer era for Nasdaq-listed firms than for NYSE-listed firms).
- Out-of-sample tests covering the period from 1996 through 2010 confirm a general absence of PRD during the post-period in the other six countries studied: Canada, France, Germany, Italy, Japan and the U.K., countries which have also had declining trading costs.
The Bottom Line
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