A new approach to predicting analyst forecast errors: Do investors overweight analyst forecasts?

I provide evidence that investors overweight analyst forecasts by demonstrating that prices do not fully reflect predictable components of analyst errors, which conflicts with conclusions in prior research. I highlight estimation bias in traditional approaches and develop a new approach that reduces this bias. I estimate characteristic forecasts that map current firm characteristics into forecasts of future earnings. Contrasting characteristic and analyst forecasts predicts analyst forecast errors and revisions. I find abnormal returns to strategies that sort firms by predicted forecast errors, consistent with investors overweighting analyst forecasts and predictable biases in analyst forecasts influencing the information content of prices.     

Using video to disclose forward-looking information: the effect of nonverbal cues on investors’ judgments

Review of Accounting Studies - We conduct two experiments to examine how investors react to nonverbal cues of certainty as displayed by a CEO communicating forward-looking information via the...     

Moral leadership and investor attention: An empirical assessment of the potus’s tweets on firms’ market returns

Review of Quantitative Finance and Accounting - Drawing upon investor attention and moral leadership theories, we examine the impact of President Trump’s tweets on firms’ market...     

Do investors show an attentional bias toward past performance? An eye-tracking experiment on visual attention to mutual fund disclosures in simplified fund prospectuses

This study examines the cognitive processes underlying investors’ extrapolations of past fund performance and whether investors’ attention patterns may explain their return-chasing behaviors. We measured the attention that investors paid to mutual fund disclosures in a simplified fund prospectus using unobtrusive infrared eye tracking. Results suggest that prior fund performance, which is normatively irrelevant information and not useful in predicting future performance, received considerable attention from investors. More interestingly, the impact of prior fund performance on investors’ purchasing intentions was fully mediated through expected returns and attention paid to past performance information. The results indicate that investors apparently believe in performance persistence or in a ‘hot hand’ effect, and that mutual fund purchases are driven by salient information such as superior performance. Moreover, we tested the disclaimer mandated by regulatory bodies, which warns that past performance does not guarantee future results. We found that the disclaimer was ineffective in reducing investors’ extrapolation biases, despite the fact that the disclaimer was attended to and properly encoded by investors.     

Out of the blue: mood maintenance hypothesis and seasonal effects on investors’ reaction to news

Contemporary research documents various psychological aspects of economic decision-making. The main goal of our study is to analyse the role of the Mood Maintenance Hypothesis (MMH) in financial markets. MMH refers to people’s tendency to maintain positive mood states, and implies that positive mood is associated with less critical thinking and reduced information processing, yielding three behavioral effects: (i) out of the blue, resulting in stronger negative reactions to bad news during good mood periods, (ii) sunray on a cloudy day, leading to stronger positive reactions to good news during bad mood periods, and (iii) shallow thinking, producing stronger reactions to all kinds of news during good mood periods. Employing daylight duration changes and a measure of onset and recovery from symptoms of Seasonal Affective Disorder (SAD) as proxies for contemporaneous investors’ mood, we test the role of mood in investors’ reactions to analyst recommendation revisions. We find corroborative results, most notably that negative stock price reactions to recommendation downgrades are significantly stronger during daylight increasing periods, and, alternatively, during the periods characterized by low rates of onset and high rates of recovery from SAD. The magnitude of the effect increases in longer event windows.     

Do investors prefer borrowers from high level of trust cities? Evidence from China’s P2P market

This study explores the effects of trust on individuals’ access to the peer-to-peer (P2P) lending market. We use data collected from the P2P lending market and the China General Social Survey and find that borrowers from cities with high trust have high borrowing success rates, thereby indicating that lenders prefer high social trust. Results in the successful sample indicate that borrowers with high regional trust also receive low loan costs and large loan amounts. Regression of trust and default proves that borrowers from cities with high social trust have minimal default rates, which may be the channel of our conclusion. Results remain unchanged when using slope and river length as instrumental variables. This research further shows that personal heterogeneity, including income level, whether borrowers work in state-owned enterprises or state agencies, and whether the fund is used for development purposes, affects the impact of social trust. In addition, the conclusions continue to be robust after replacing the explanatory variable, control variable, and sample. Finally, this study determines that fairness plays a consistent role with trust, but happiness plays an opposite role.     

Refinance and Mortgage Default: A Regression Discontinuity Analysis of HARP’s Impact on Default Rates

This paper examines the impact of refinancing on mortgage defaults based on an empirical investigation of the Home Affordable Refinance Program (HARP). We study a unique dataset from Freddie Mac which includes loans funded right before and after the HARP eligibility cutoff date, an exogenous event. Using a Fuzzy Regression Discontinuity Design method, we show that receiving a HARP refinance decreases the expected monthly default rate by about 48–62 percent using different bandwidth specifications.     

The impact of energy-exporting countries’ EPUs on China’s energy futures investors: Risk preference,investment position and investment horizon

This study brings some new insights into EPU risk management. By categorizing China’s energy futures (CEF) investors by risk preference, investment position and investment horizon, we identify how EPU in four energy-exporting countries affects CEF investors. The Russian EPU mainly produces influence on short-run investors and risk-seeking investors. The Australian EPU affects risk-seeking investors heavily, while the Brazilian EPU acts on risk-seeking investors with short positions. In terms of China’s coking coal futures, changes in Russian EPU generate the weakest impact on various types of investors, while the US EPU affects medium-run risk-averse and long-run investors. The Australian EPU’s impact on investor types covers a wide range, while the Brazilian EPU affects short-run risk-averse and long-run investors. Moreover, for medium-run CEF investors, energy-exporting countries’ EPU risk characteristics is most dynamic. Changes in the EPU risk impact type mainly occurred during the US-China trade war and the outbreak of COVID-19.     

Does greater user representation lead to more user focused standards? An empirical investigation of IASB’s approach to standard setting

The International Accounting Standards Board (IASB) has faced calls to act in the interest of users of financial statements given the perception of the greater influence exerted by preparers and professional accounting firm stakeholders. In response, the IASB has, over more than a decade, sought to increase user centricity, adapting its people and processes to more fully engage the views of users. We report on our empirical analysis from the standard setter’s perspective of user engagement which is a research objective not documented in the prior literature. Our results draw on interviews conducted with 31 IASB representatives, comprised of 26 staff and 5 Board members representing approximately 60% of IASB’s non-support staff as well as publically available archival data. We deploy the Griffiths (1960) citizenship participation framework in reporting on the procedural rigor directed at user utility, to assess IASB’s attempt to enhance its perceived relevance (existential enhancement) as a standard setting body. We explain how a “clash” between new user centric practices and the extant practices led to challenges for the IASB in factoring the views of, and acting in the interest of users, as demanded by regulatory authorities. We discuss some of the tensions this has made evident in IASB’s objective to function as an effective standard setter. Conceptually, our paper clarifies how more embedded representation modes per Griffith (1960) elicited greater user feedback, but that tensions arose in relation to the IASB’s broader objectives to more directly serve users’ interests. Functionally, we offer a more nuanced appreciation for why the IASB might not unilaterally seek to be “user-focused” in the interests of both users and other stakeholders, and in doing so, serve the longer term objectives of accounting standard setting.     

Communicating risk for issues that involve ‘uncertainty bias’: what can the Israeli case of water fluoridation teach us?

Water fluoridation is a controversial issue in public health. Despite the uncertainty regarding its efficacy and safety, health officials continue to communicate it as ‘unequivocally’ safe and effective. Our focus is on how health officials and policy-makers in Israel frame the issue of water fluoridation in terms of certainty while promoting a mandatory fluoridation policy. According to van Asselt and Vos, the uncertainty paradox describes situations in which uncertainty is acknowledged, but the role of science is framed as providing certainty. Our study is an analysis of documents and media articles emphasizing the paradoxical language used by official representatives on the controversial topic of fluoridation. A central contribution of this study is that we coin the term ‘uncertainty bias,’ in which policy-makers do exactly what they accuse laypeople of doing, framing uncertainty in biased terms. We found that in order to establish mandatory regulation, health ministry officials expressed information in an unbalanced format, promoting the topic of fluoridation by framing it in exclusively positive terms. This study does not focus on the practice of water fluoridation per se, and is not intended to decide for or against it, but rather, to explore how the debate regarding it is communicated. Understanding this particular case can shed light on how other controversial topics are transformed into health policy that is characterized in equivocal terms.     

Do management EPS forecasts allow returns to reflect future earnings? Implications for the continuation of management’s quarterly earnings guidance

Using 18,253 firm-year observations from 1998 through 2003, we build on literature suggesting that more informative disclosures allow returns to better reflect future earnings and test whether management earnings per share forecasts and their characteristics influence the future earnings response coefficient (FERC). We find that FERCs are greater for forecasting firms and when forecasts are more frequent or precise. We suggest that more frequent and more precise forecasts assist investors in better predicting future earnings. Importantly, we find that quarterly and short-term forecasts incrementally increase the association between returns and future earnings beyond annual and long-term forecasts; thus, even short-term, quarterly forecasts allow investors to form better expectations about future earnings. This suggests a benefit of quarterly earnings forecasts possibly overlooked in recommendations from the United States Chamber of Commerce, CFA Institute, Business Roundtable Institute for Corporate Ethics, and The Conference Board to eliminate quarterly earnings guidance.     

Online monitoring and assessment of emerging risk in conventional industrial plants: possible way to implement integrated risk management approach and KPI’s

Existing methodologies and practices do not provide enough possibility for online monitoring and assessment of emerging risks occurring as a result of a change in technology, product, operating conditions, as well as in organization of activities in conventional industrial plants. Typical today’s off and online methods and corresponding software packages are used as risk assessment methods, while various risk aspects (such as: process risks, process equipment integrity risks, organizational risks, and health and environmental risks) are being assessed and treated independently. However, it is clear that risk assessment and making decisions in line with that has to be based on information collected from different (independent) sources in online mode. Also, the fact that additional risks in operations may occur due to unexpected changes in technology, accidents or unexpected process equipment degradation should be taken into account. When monitoring and process management systems are being designed and developed, only the process aspect and process risk are usually analyzed, while other risk aspects are not taken into account (like health and environmental risks). A new approach, to be presented in this paper, provides a possibility of online monitoring and assessment of risks (e.g. in petrochemical industry, power industry, etc.).