Who Herds? Who Doesn't? Estimates of Analysts’ Herding Propensity in Forecasting Earnings

We develop parametric estimates of the imitation‐driven herding propensity of analysts and their earnings forecasts. By invoking rational expectations, we solve an explicit analyst optimization problem and estimate herding propensity using two measures: First, we estimate analysts’ posterior beliefs using actual earnings plus a realization drawn from a mean‐zero normal distribution. Second, we estimate herding propensity without seeding a random error, and allow for nonorthogonal information signals. In doing so, we avoid using the analyst's prior forecast as the proxy for his posterior beliefs, which is a traditional criticism in the literature. We find that more than 60 percent of analysts herd toward the prevailing consensus, and herding propensity is associated with various economic factors. We also validate our herding propensity measure by confirming its predictive power in explaining the cross‐sectional variation in analysts’ out‐of‐sample herding behavior and forecast accuracy. Finally, we find that forecasts adjusted for analysts’ herding propensity are less biased than the raw forecasts. This adjustment formula can help researchers and investors obtain better proxies for analysts’ unbiased earnings forecasts.     

Share trading activity and the rise of the rentier in the UK before 1920*

Abstract

Using a hand-collected dataset, we examine share trading activity over the period 1882–1920 for the North British and Mercantile Insurance Company, one of the largest UK companies of the time. Our main finding is that the steady flow of rentiers into the shareholding constituency of this company stymied share trading activity. Another important finding is that share trading still occurred during the closure of the stock exchange in 1914, but on a much-reduced scale. We also find that there was a substantial boom in share trading and in insurance stock prices after World War I.     

The effects of competitive context on consumer response to price changes

ABSTRACT

This paper aims to understand how a brand’s price level, relative to its competitors, will affect consumers’ responses to price changes of the brand. The study uses experiments to examine brand choice responses to price increases and decreases across contexts differing in competitor brands and their respective prices. These experiments are conducted with six consumer goods categories. The research identifies three key factors that affect the size of responses to brand price changes – (1) passing a competitor brand’s price, (2) narrowing versus widening the price gaps with competitors, and (3) whether competitors are predominantly higher or lower priced brands.     

The untold story of commodity futures in China

We investigate the behavior of commodity futures risk premia in China. In the presence of retail-dominance and barriers-to-entry, the term structure and momentum premia remain persistent, whereas hedging pressure, skewness, volatility, and liquidity premia are distorted by time-varying margins and strict position limits. Furthermore, open interest, currency, and inflation premia are sensitive to institutional settings. The observed premia cannot be attributed to common risks, sentiment, transactions costs, or data-snooping, but are related to liquidity, anchoring, and regulation-induced limits-to-arbitrage. We highlight the distinctive features of Chinese futures markets and assess the challenges posed to theories of commodity risk premia.     

Financial integration and banking crisis. A critical analysis of restrictions on capital flows

We investigate the effect of financial integration on a banking crisis. In contrast to existing works, we allow for capital restrictions while studying the impact of financial integration on a banking crisis. Using firm-level lending and borrowing information in the global market of syndicated loans; we generate aggregate measures of financial integration and examine how countries with capital flow restrictions thrive in the wake of a banking crisis. We concentrate on basic network measures of integration for a panel of 62 countries that allow for capital restriction at any time within the sample period. Financial integration increases the incidence of a banking crisis, and capital restrictions worsen a banking crisis. However, capital restrictions reduce the negative impact of financial integration on the incidence of a banking crisis. Thus, financial integration becomes beneficial when countries allow for some forms of capital control.     

Equity valuation: A survey of professional practice

This paper reports the results of a scientific survey of the equity valuation practices of CFA Institute members with equity analysis job responsibilities. Using an instrument designed to minimize biases in prior valuation surveys and sampling a larger group than in previous studies (13,500 investment professionals, resulting in 1,980 valid completed questionnaires), this paper documents professional practices in the selection of equity valuation approaches, including specific model variations and key input preferences. Important differences in practice were observed across geographies and employer firm types.     

THE EFFECTS OF LOTTO GAME CHANGES AND LARGE JACKPOTS ON INCOME ELASTICITIES AND SALES

Using daily lottery data from Washington State by zip code from January 2011 through mid‐March 2016, we estimate that Powerball income elasticities range from ?0.16 to 0.16 as the Powerball jackpot increases from its minimum to $1.5 billion, while Mega Millions income elasticities range from ?0.08 to 0.03 as the Mega Millions jackpot increases from its minimum to $640 million. Controlling for jackpot size, each of three major game changes during this time period has a significant effect on own‐game and cross‐game sales. Despite these significant game changes, however, these lotto games are a highly regressive source of revenue for Washington State. (JEL H22, H71, L83)