Which types of analyst firms are more optimistic?

Research optimism among securities analysts has been attributed to incentives provided by underwriting activities. We examine how analysts’ forecast and recommendation optimism varies with the business activities used to fund research. We find that analysts at firms that funded research through underwriting and trading activities actually made less optimistic forecasts and recommendations than those at brokerage houses, who performed no underwriting. Optimism was particularly low for bulge underwriter firm analysts, implying that firm reputation reduces research optimism. There is also evidence that analysts at retail brokerage firms are more optimistic than those serving only institutional investors. We conclude that analyst optimism is at least partially driven by trading incentives.     

Do Weather‐Induced Moods Affect the Processing of Earnings News?

We investigate whether unpleasant environmental conditions affect stock market participants’ responses to information events. We draw from psychology research to develop a new prediction that weather‐induced negative moods reduce market participants’ activity levels. Exploiting geographic variation in equity analysts’ locations, we find compelling evidence that analysts experiencing unpleasant weather are slower or less likely to respond to an earnings announcement relative to analysts responding to the same announcement but experiencing pleasant weather. Price association tests find evidence consistent with reduced activity due to weather‐induced moods delaying equilibrium price adjustments following earnings announcements. We also use our analyst‐based research design to re‐examine an existing prediction that unpleasant weather induces investor pessimism, and find evidence of both analyst pessimism and reduced activity in the presence of unpleasant weather. Together, our study provides new evidence that both extends and reaffirms findings of a relation between unpleasant weather and market activities, and contributes to the broader psychology and economics literature on the impact of weather‐induced mood on labor productivity.     

Institutional investor information network,analyst forecasting and stock price crash risk

In this paper, we construct the information network of fund investors based on the theory of social relationship networks and examine its impact of fund information sharing with analysts on stock price crash risk. Our results show that private information sharing among institutional investors reduces crash risk. Further results show that fund information sharing can alleviate analyst optimism bias and improve analyst forecast accuracy, which further reduces stock price crash risk. Moreover, these identified effects are more pronounced in a bull market than a bear market. Our study contributes to the research on private information transmission in fund information networks, and provides a new perspective for recognizing the relationships among institutional investor behavior, analyst forecasting, and stock price crash risk.     

External monitoring and returns to hedge fund activist campaigns

Firms targeted by hedge fund activists experience significantly higher returns when there are fewer external monitors in place at the target firm. Using analyst coverage and institutional ownership as measures of external monitoring presence, we find that low‐monitored activist targets experience abnormal returns 17.52% above that of high‐monitored targets in the 2‐year period following the initial campaign start date. The significant effect of external monitoring remains after controlling for target firm and activist characteristics. We also document improved operating performance and an increased monitoring presence at low‐monitored target firms across the same 2‐year period, consistent with the observed market performance.     

Isolating the Information Content of Equity Analysts' Recommendation Changes,Post Reg FD

We investigate the information content of equity analysts' recommendation changes subsequent to the passage of Regulation Fair Disclosure. We find that analyst upgrades (downgrades) are associated with positive (negative) abnormal returns. Overall, stock prices tend to react significantly more strongly to recommendation changes accompanied by news events than to those that are not. Even so, returns around recommendation changes not accompanied by news are significantly different from zero. This result holds after controlling for firm‐specific variables and the incidence of multiple simultaneous recommendation changes. We conclude that analyst recommendation changes, in and of themselves, are informative.     

CDS trading and analyst optimism

This paper investigates whether and how the initiation of Credit Default Swaps (CDS) trading affects analyst forecast optimism. First, we document that the initiation of CDS trading curbs analyst forecasts optimism. Second, we find that the dampening effect of CDS on analyst optimism is stronger for firms with negative news and for firms with poorer financial performance or higher leverage, supporting a “correction effect” of CDS on non-strategic optimism. Moreover, we find that CDS also has a “disciplining effect” on strategic optimism that arises from incentives to cultivate relation with management or to please institutional investors. Overall, our evidence shows that the CDS market not only provides important information for analysts, but also alters analysts’ reporting incentives and enhances their objectivity. Additional analysis shows that this effect has disappeared after the Dodd-Frank Act.     

Analyst Report Readability and Stock Returns

This study investigates the market's response to analyst report readability. We posit that readable reports decrease uncertainty of earnings expectations and by extension increase stock prices. Our results show that the equity market reacts more positively to readable reports and that this positive reaction is attributable to a reduction in uncertainty of future performance. Moreover, we find that the effect of readability on stock prices is significantly positive only for firms with greater R&D spending, higher bid‐ask spreads, a greater proportion of uninformed investors, and more experienced analysts, which suggests that readability matters only when information asymmetry in the equity market is high.     

Stock index adjustments and analysts’ forecast optimism: A quasi-natural experiment on the CSI 300 Index

As stock index adjustments comprise a basic system of capital market, their potential influence on analysts’ earnings forecasts is worthy of research. Based on a research sample of 23 adjustments to the CSI 300 Index from June 2007 to June 2018 and the backup stocks announced during the same period, this study examines the impact of additions to stock index on analysts’ forecast optimism using a staggered difference-in-differences model. The research results show that after stocks are added to the stock index, analysts’ earnings forecast optimism about these stocks increases significantly. Cross-sectional analysis indicates that this increase is more significant when the market is bullish, institutional ownership is low, the ratio of listed brokerage firms is low, star analyst coverage is low, firms show seasoned equity offering activity, the ratio of analysts from the top five brokerage firms ranked by commission income is high, and the analysts’ brokerage firms are shareholders. However, analyst-level tests find that analysts’ ability helps to reduce the impact of additions to stock index on earnings forecast optimism. Furthermore, additions to stock index significantly increase analyst coverage and forecast divergence. Economic consequences tests find additions to stock index significantly increases stock price synchronization, which is partly mediated by analysts’ earnings forecast optimism. This study enriches the literature on the impact of basic capital market systems and analyst behavior. The findings suggest that investors should rationally evaluate analysts’ earnings forecasts for stocks added to the stock index and obtain further information from various channels to improve asset allocation efficiency.     

The impact of all-star analyst job changes on their coverage choices and investment banking deal flow

Using a sample of all-star analysts who switch investment banks, we examine (1) whether analyst behavior is influenced by banking relationships and (2) whether analyst behavior affects investment banking deal flow. Although the stock coverage decision depends on the relationship with the client firms, we find no evidence that analysts change their optimism or recommendation levels when joining a new firm. Investment banking deal flow is related to analyst reputation only for equity transactions. For debt and M&A transactions, analyst reputation does not matter. There is no evidence that issuing optimistic earnings forecasts or recommendations affects investment banking deal flow.     

Research for sale: Determinants and consequences of paid-for analyst research

I examine the determinants and market impact of paid-for coverage using a hand-collected sample of paid-for reports over 1999–2006. More than five hundred publicly listed US companies paid for analyst coverage since 1999. Yet little is known about the informational consequences of this analyst research. Firms with greater uncertainty, weaker information environments, and low turnover are more likely to buy coverage as they have the most to gain from analyst coverage but are unlikely to attract sell-side analysts. Despite the inherent conflicts of interest, I find paid-for reports have information content for investors based on 2-day abnormal returns. After the initiation of coverage, companies experience an increase in institutional ownership, sell-side analyst following, and liquidity. In addition, the results are strongest for the fee-based research firm with ex ante policies that reduce potential conflicts of interest.     

The U.S. Share of Trading Volume in Cross‐Listings: Evidence from Canadian Stocks

I analyze the firm‐specific determinants of the U.S. share of trading volume for 126 U.S.‐listed Canadian firms. I find that the U.S. share of volume is directly related to the mass of informed and liquidity traders in the United States relative to Canada, as proxied by relative analyst following, relative duration of listing, and the U.S. share of sales. Evidence also supports the market liquidity argument that the market with lower spreads and greater depths has greater volume. Finally, the U.S. share is directly related to the relative sensitivity of the stock's value to information in the United States.     

The impact of capital market imperfections on investment–cash flow sensitivity

We examine the investment–cash flow sensitivity of US manufacturing firms in relation to five factors associated with capital market imperfections – fund flows, institutional ownership, analyst following, bond ratings, and an index of antitakeover amendments. We find a steady decline in the estimated sensitivity over time. Furthermore, we find that investment–cash flow sensitivity decreases with increasing fund flows, institutional ownership, analyst following, antitakeover amendments and with the existence of a bond rating. The overall evidence suggests that investment–cash flow sensitivity decreases with factors that reduce capital market imperfections.     

TRADING COSTS OF NON‐U.S. STOCKS ON THE NEW YORK STOCK EXCHANGE: THE EFFECT OF INSTITUTIONAL OWNERSHIP,ANALYST FOLLOWING,AND MARKET REGULATION

We investigate the differences in market microstructure between U.S. and non‐U.S. stocks cross‐listed on the New York Stock Exchange using a sample of 316 pairs of matched stocks. We find that non‐U.S. stocks have wider spreads and larger adverse‐selection costs than U.S. stocks even after controlling for macro‐level institutional differences. Regression analysis shows that spreads and adverse‐selection costs are negatively correlated with institutional ownership and analyst followings. Thus, the higher spreads and adverse‐selection costs for non‐U.S. stocks can be partly explained by the lower institutional ownership and analyst following of non‐U.S. stocks. In addition, we find that although the spreads and adverse‐selection costs for non‐U.S. stocks are significantly higher before the implementation of Regulation Fair Disclosure (FD), the differences become even greater after Regulation FD, suggesting that Regulation FD has improved the information environment for U.S. stocks.     

Taxes,tenders and the design of Australian off‐market share repurchases

In designing off‐market (self‐tender offer) share repurchases, Australian companies must consider the resulting potential tax benefits for different investor groups with consequent effects upon the supply of stock tendered by holders and the ultimate tender outcome. We develop and estimate a model of the stock supply curve that demonstrates less than perfect elasticity and incomplete tax arbitrage arising from ‘participation risk’ for potential arbitrageurs. We are able to estimate the extent of disequilibrium in prices involved in fixed‐price repurchases and show that it is substantial. We show that Australian Tax Office restrictions on the tender price range for Dutch auctions have meant that non‐participating shareholders have foregone some potential benefits through the transfer of tax benefits to (primarily institutional, low tax rate) successful tender participants. The results provide support for legislative changes proposed in 2009 (but not implemented as of mid 2011), which removed constraints on the allowable range of repurchase prices.     

The effects of regulation on industry structure and trade generation in the US securities industry

This study investigates the effects of Regulation FD and the Global Research Analyst Settlement on market share within the US securities industry as well as the determinants of market share during 1996–2004. We find that these regulations did not cause top brokers to lose market share in spite of their reduction of information asymmetries existing within the brokerage industry. They did, however, significantly reduce the quarterly variability in market share changes. We find that Regulation FD and the Global Research Analyst Settlement reduce the importance of an all-star analyst, issuer affiliation, and analyst optimism for gaining brokerage market share. We further discover that the Global Research Analyst Settlement increases the importance of coverage as a market share determinant while reducing the value of analyst experience for non-top brokers. We find that our results remain robust even when we limit our analysis to a set of pure brokerage firms.     

Institutional herding in international markets

This paper studies herding behavior of institutional investors in international markets. First, we document the existence of wide-spread herding in 41 countries (referred to as “target countries” hereafter) in the sample. We then examine the relation between contemporaneous institutional demand and future returns and find that institutional herding stabilizes prices. Next, we examine the relation between institutional investors’ herding behavior and the level of information asymmetry in the target countries. We measure the degree of information asymmetry in each target country along five dimensions: (1) stock market development, (2) ease of access to information, (3) corporate transparency, (4) investor rights, and (5) macroeconomic factors that relate to the information environment. We find evidence that institutional investors herd more in markets characterized by low levels of information asymmetry (high level of information transparency). This result suggests that institutional investors’ herding behavior is likely driven by correlated signals from fundamental information. Lastly, we show that price adjustment is faster in informationally transparent markets.     

The effect of restatements on analyst behavior

This paper examines how changes in the credibility of financial reporting affect analyst behavior. Using a sample of restatement firms experiencing a substantial change in credibility over 1997–2006, we document that restatements have a long‐lived effect on analyst behavior and that analysts differentiate between restatements caused by irregularities and those caused by errors. We find that while irregularity restatement firms exhibit a reduction in analyst coverage and forecast accuracy and an increase in forecast dispersion in the post‐restatement period, other restatement firms exhibit only an increase in forecast error. Finally, we find evidence to suggest that remedial actions reduce the effect of irregularity restatements on analyst behavior. Overall, these results are consistent with the notion that restatements affect analyst behavior in forming judgements regarding subsequent earnings announcements.     

INSTITUTIONAL TRADING AND OPENING PRICE BEHAVIOR: EVIDENCE FROM A FAST‐EMERGING MARKET

Using daily and intraday data, we investigate the cross‐sectional relation between stock prices and institutional trading in the Taiwan stock market. Consistent with the investigative herding hypothesis, we find that institutional herding exists because of institutional positive feedback trading behavior rather than following trades made by other institutions, as suggested by the information cascade hypothesis. Moreover, the positive correlation between institutional trade imbalance and stock returns mainly comes from institutional positive feedback trading. The institutional trading decisions rely on returns measured not only over the lagged trading day but also over the opening session during the same day.     

Analyst Optimism and Incentives under Market Uncertainty

We examine how analysts’ changing incentives driven by changes in market uncertainty affect their forecast optimism. Analysts issue more optimistically biased earnings forecasts and buy recommendations under high market uncertainty (VIX). The lower reputational costs and larger benefits of optimistic output explain the increased optimistic output: Analysts are less likely to be penalized for inaccuracy and can stimulate more trading activity from optimistically biased output when market uncertainty is high. We find that the likelihood of analysts’ turnover decreases, while the trading volume associated with optimistic output increases, with VIX. No evidence suggests that analysts’ self‐selection affects our findings on optimism and market uncertainty.     

Investor Sentiment and Pre-IPO Markets

We examine whether irrational behavior among small (retail) investors drives post‐IPO prices. We use prices from the grey market (the when‐issued market that precedes European IPOs) to proxy for small investors' valuations. High grey market prices (indicating overoptimism) are a very good predictor of first‐day aftermarket prices, while low grey market prices (indicating excessive pessimism) are not. Moreover, we find long‐run price reversal only following high grey market prices. This asymmetry occurs because larger (institutional) investors can choose between keeping the shares they are allocated in the IPO, and reselling them when small investors are overoptimistic.