Impact of Regulatory Enforcement on Leakages Prior to Analyst Recommendations

The financial press suggests that information is commonly leaked prior to analyst recommendations. We examine the impact that three regulatory actions (Regulation Fair Disclosure, Global Analysts Research Settlement, and the legal case against Galleon Group) have on information leakage prior to analyst recommendations. We find that all three regulatory actions have significantly reduced the leakage of information prior to analyst recommendations, even after controlling for several characteristics that explain the variation in information leakage. Our results are robust when applying an alternative method of measuring information leakage, and when forming various samples of analyst recommendations based on different criteria.     

The Effect of CEO Extraversion on Analyst Forecasts: Stereotypes and Similarity Bias

In an experiment with professional analysts, we study their reliance on CEO personality information when producing financial forecasts. Drawing on social cognition research, we suggest analysts apply a stereotyping heuristic, believing that extraverted CEOs are more successful. The between‐subjects results with CEO extraversion as treatment variable confirm that analysts issue more favorable forecasts (earnings per share, long‐term earnings growth, and target price) for firms led by extraverted CEOs. Increased forecast uncertainty leads to even stronger stereotyping. Additionally, personality similarity between analysts and CEOs has a large effect on financial forecasts. Analysts issue more positive forecasts for CEOs similar to themselves.     

An Analysis of Accounting Frauds and the Timing of Analyst Coverage Decisions and Recommendation Revisions: Evidence from the US

This paper provides a comprehensive exploration of the types of accounting fraud committed by firms over the period 1995–2009. Using detailed data from US SEC Accounting and Auditing Enforcement Releases (AAER), we examine the likelihood and timing of analyst coverage decisions and recommendation revisions related to fraud firms versus firms without accounting fraud. We find that analysts have a higher probability of taking the more severe action of dropping coverage rather than only revising down recommendations for firms with any type of accounting fraud and also for specific egregious types of accounting fraud. Through the use of competing hazards models, we also find that accounting frauds and their egregiousness are positively (negatively) associated with the timeliness of the analysts’ action to drop coverage (revise only). Overall, we find that analysts’ actions may be useful in determining the occurrence of accounting fraud prior to the public announcement of the fraud.     

Do Firms Use M&A Business to Pay for Analyst Coverage?

We find that acquirers in merger and acquisition (M&A) transactions are more likely to hire as advisors investment banks that provided analyst coverage for the acquirer prior to the transaction. We also find that compared to a matched control group of banks, the advisor banks are less likely to terminate and more likely to initiate analyst coverage of the acquirer after the transaction. Finally, the advisor banks that initiate coverage after the transaction collect higher fees. These findings suggest that firms value analyst coverage and use M&A advisor appointments and advisor fees to compensate for it.     

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.     

The Impact of NASD Rule 2711 and NYSE Rule 472 on Analyst Behavior: The Strategic Timing of Recommendations Issued on Weekends

Amendments to NASD Rule 2711 and NYSE Rule 472, enacted in May 2002, mandate that sell‐side analysts disclose the distribution of their security recommendations by buy, hold and sell category. This regulation enhances the transparency of analysts’ information and mitigates the long‐recognized optimistic bias in their recommendations. However, we find that analysts are more likely to issue sell recommendations or downgrade revisions on weekends when investors have limited attention after these rule changes. This pattern is more pronounced for prestigious analysts, who are more likely to influence stock prices. Market reaction tests reveal an incomplete immediate response and a greater drift to unfavorable recommendations issued on weekends. Finally, analysts who are more likely to release unfavorable recommendations on weekends exhibit higher future forecast accuracy. Our findings suggest that, while these regulatory changes effectively reduce analysts’ optimistic bias, they are also associated with an increased prevalence of a different form of distortion in the capital market.     

Do Analyst Stock Recommendations Piggyback on Recent Corporate News? An Analysis of Regular‐Hour and After‐Hours Revisions

Analysts often update their recommendations following corporate news. Questions have been raised regarding analysts’ ability to generate new information beyond recent corporate events. Employing a comprehensive database on corporate news, we show that only a small minority, or 27.9%, of all recommendation revisions directionally confirm the information in the preceding corporate events and even these “confirming revisions” facilitate the information discovery of corporate events and thus cannot simply be dismissed as “piggybacking.” Our analysis further shows that analysts not only facilitate price discovery to corporate news through issuing trending revisions but also help reverse prevailing market sentiments following corporate news by issuing contrarian revisions. Our study is the first to investigate short‐window intraday market reactions to revisions issued after hours, which account for 70% of all recommendation revisions in our sample period. Analysts’ incentives to issue revisions after hours appear to reflect demands from large institutional clients, who dominate after‐hours trading. More importantly, we show that the after‐hours revisions are associated with significantly greater price reactions and different price reaction patterns than revisions issued during regular trading hours. Collectively, our evidence indicates that analysts are a significant source of new information beyond recent corporate news and they also help shape the market's assessment of corporate disclosures.     

When Analysts Talk,Do Institutional Investors Listen? Evidence from Target Price Changes

We find that institutions trade in the same direction as target price changes based on 6,415 U.S. firms from 1999 to 2011, even after controlling changes in stock recommendations and earnings forecasts. The impact of target price changes on institutional trading is more pronounced for small firms, firms followed by few analysts, and illiquid firms, and is mainly limited to transient institutions. We do not find any outperformance for institutions to follow analysts’ target price forecasts, suggesting that institutions could find it easier to justify their investment decisions by following analyst forecasts, although such trading does not result in outperformance.     

Yes,The Value Line Enigma Is Still Alive: Evidence from Online Timeliness Rank Changes

Beginning June 9, 2005, Value Line started announcing its Timeliness changes online at 10:00 a.m. on Thursday, one day earlier than Friday noon's post‐delivery. We confirm that the Value Line effect still exists but shifts to Thursday in the Internet era. Unlike previous findings, the next‐day abnormal return after the announcement has disappeared, suggesting that the market efficiently priced the change. We find that a portfolio upgraded from rank 5 to 4 gains the highest cumulative abnormal return of 9.07% over a 50‐day window. Finally, we find that the post‐earnings announcement drift does not explain the Value Line enigma.     

The Effects of Analyst‐Country Institutions on Biased Research: Evidence from Target Prices

Prior research demonstrates that a strong institutional infrastructure in a country moderates self‐serving behavior of market participants. Cross‐country economic activities have increased significantly, presenting a research opportunity to examine the relative influence of local versus foreign institutional infrastructure on individual market participants. We utilize variation in analyst‐country location relative to covered firm location to examine institutional determinants of optimism in analyst research. Focusing on target prices, where persistent optimism is well documented, we find that analysts domiciled in countries with stronger institutional infrastructures exhibit significantly attenuated target price optimism and more value‐relevant target prices. Our results demonstrate the importance of domestic country‐level institutional factors in moderating self‐serving behavior of market participants engaged in cross‐country activities.     

A New Measure of Equity and Cash Flow Duration: The Duration‐Based Explanation of the Value Premium Revisited

This article reexamines the duration‐based explanation of the value premium using novel estimates of the firms' equity and cash flow durations based on analyst forecasts. We show that the value premium can be explained by cross‐sectional differences in the shares' equity durations, but not by their cash flow durations. Different from the duration‐based explanation of the value premium that explains the value premium with cross‐sectional differences in the firm's cash flow timing, we find that short‐horizon stocks have lower (expected) returns than long‐horizon stocks. This result is consistent with an upward‐sloping equity yield curve.     

The impact of banking regulations on banks' cost and profit efficiency: Cross-country evidence

This paper uses stochastic frontier analysis to provide international evidence on the impact of the regulatory and supervision framework on bank efficiency. Our dataset consists of 2853 observations from 615 publicly quoted commercial banks operating in 74 countries during the period 2000-2004. We investigate the impact of regulations related to the three pillars of Basel II (i.e. capital adequacy requirements, official supervisory power, and market discipline mechanisms), as well as restrictions on bank activities, on cost and profit efficiency of banks, while controlling for other country-specific characteristics. Our results suggest that banking regulations that enhance market discipline and empower the supervisory power of the authorities increase both cost and profit efficiency of banks. In contrast, stricter capital requirements improve cost efficiency but reduce profit efficiency, while restrictions on bank activities have the opposite effect, reducing cost efficiency but improving profit efficiency.     

The consequences to analyst involvement in the IPO process: Evidence surrounding the JOBS Act

The JOBS Act allows certain analysts to be more involved in the IPO process, but does not relax restrictions on analyst compensation structure. We find that these analysts initiate coverage that is more optimistically biased, less accurate, and generates smaller stock market reactions. Investors purchasing shares following these initiations lose over 3% of their investment by the firm's subsequent earnings release. By contrast, issuers, analysts, and investment banks appear to benefit from this increased bias, as optimism is more positively associated with proxies for firm visibility and investment banking revenues when analysts are involved in the IPO process.     

The First‐ and Second‐Hand Effect of Analysts' Stock Recommendations: Evidence from the Swiss Stock Market

This paper empirically investigates the impact of both the first release of analysts' stock recommendations to a limited clientele and the subsequent dissemination of the same information in a major newspaper to a broader audience. For a sample of 1460 stock recommendations published in FuW, Switzerland's major financial newspaper, significant positive abnormal returns on the day of the original release of buy recommendations and on the day of publication in FuW are documented. Tests of the price pressure and information hypotheses reveal that analysts' recommendations contain new information, which is quickly incorporated in the stock prices on the first release of this information. In contrast, the statistically significant announcement effects associated with the subsequent publication can be primarily ascribed to price pressure in the underlying securities.     

The Role of Gatekeepers in Capital Markets

Gatekeepers in financial markets have the power to provide the institutional stability, fortitude, and direction necessary for the development and the smooth functioning of capital markets. At the same time, they are often motivated by their own private incentives. This along with the tradeoffs they face, and the at‐times unintended consequences of the regulations they propose and enforce, can undermine their effectiveness. A thorough understanding of gatekeepers and their roles can thus illuminate academics, the financial community, and regulators on how such gatekeepers can be the most effective and generate the greatest benefits for capital markets. Since gatekeeping roles and the literature they have inspired encompass a wide array of institutions and agencies, our overview concentrates on those that the conference papers appearing in this volume focus on. We conclude that collectively, the papers contribute to significant progress, and point out some crucial areas that call for further investigation and offer opportunities for future research.     

Investment bank monitoring and bonding of security analysts’ research

We assess investment banks’ influence over the agreement between their analysts’ research behavior and their clients’ interests, in the post-reform era. Competing banks discipline their analysts with worse career outcomes for producing biased reports, issuing shirking reports, and for involvement in the earnings guidance game, showing meaningful monitoring of their analysts. Highly reputable banks provide more monitoring discipline of their analysts and bonding of their moral hazard than other banks. The findings agree with the banks taking responsibility for aligning analysts’ behavior with clients’ interests.