Initiating coverage,broker reputation and management earnings forecasts in Australia

We examine more than 5000 recommendations made by Australian brokers in the period 1996–2001. We find evidence that initiating recommendations produce greater share price responses than continuing recommendations, particularly for hold, underperform and sell recommendations. We also find evidence that initiating recommendations made by higher‐reputation brokers and those made in the absence of a management earnings forecast attract different share price responses. Finally, we find that share price responses to initiating recommendations, conditional on the market consensus recommendation, are significantly different to continuing recommendations.     

Analyst Activity and Firm Value: Evidence from the REIT Sector

This paper is the first to examine (1) properties of analyst forecasts and (2) effects of analyst following on firm value for all REITs on CRSP, Compustat and I/B/E/S. Our results suggest that REITs operate in an information environment that has changed over time. We find that for periods when the REIT industry was either in the developmental stage (pre-1992), or after other structural changes in the industry (post-2000), more analysts cover REITs and forecasts are more accurate and less biased. Further, we find that mortgage REITs are more transparent than other REIT structures and exhibit properties of analyst behavior that are different from other types of REITs. Our investigation into the effect of analyst coverage on REIT value suggests that analyst coverage increases REIT value (as measured by Tobin’s q) and that the causality does not run the opposite way.

Analyst forecast,accounting conservatism and the related valuation implications

This study investigates whether financial analysts incorporate accounting conservatism into their earnings forecasts and whether it is more difficult for them to forecast earnings for less conservative firms, and then examines the impact of the findings on the return predictability of the value‐to‐price (V/P) ratio. After controlling for the other factors affecting forecast accuracy, such as earnings predictability and information uncertainty, I find that analysts incorporate accounting conservatism into their earnings forecasts and that forecasting earnings is more difficult for less conservative firms. Consequently, the return predictability of the V/P ratio is stronger for more conservative firms, and previously reported return predictability of the V/P ratio is an average across firms with differing levels of conservatism.     

Conditional Asset Pricing and Stock Market Anomalies in Europe

This study provides European evidence on the ability of static and dynamic specifications of the Fama‐French (1993) three‐factor model to price 25 size‐B/M portfolios. In contrast to US evidence, we detect a small‐growth premium and find that the size effect is still present in Europe. Furthermore, we document strong time variation in factor risk loadings. Incorporating these risk fluctuations in conditional specifications of the three‐factor model clearly improves its ability to explain time variation in expected returns. However, the model still fails to completely capture cross‐sectional variation in returns as it is unable to explain the momentum effect.     

On the Determinants of Optimism in Financial Analyst Earnings Forecasts: The Effect of the Market's Ability to Adjust for the Bias

This paper examines whether the documented bias in analyst earnings forecasts is intentional by examining whether it is related to the market's ability to adjust for this bias. For intentional bias to exist it is not enough for analysts to face incentives but rather, analysts should also be willing to respond to these incentives. As the market's ability to adjust for the bias increases, its market effects decrease while analyst reputation costs increase reducing analyst willingness to bias their forecasts. The paper utilizes a firm‐specific design that allows for both the bias component of the forecast error and the market's ability to adjust for the bias to be computed at the firm level. Results suggest that even though forecast error is positive in the latter part of the period under review reflecting overall analyst pessimism, the bias embedded in the forecasts is optimistic throughout the period. More importantly, I find that analyst forecast bias is decreasing in the market's ability to adjust for it. This result provides further evidence that analysts knowingly bias their forecasts and provides support for the existence of reporting bias, in particular. Thus, the evidence provides justification for recent regulatory efforts to increase the objectivity of analyst research reports.     

Analyst reputation and management earnings forecasts

Prior studies show that analysts with high reputation are influential in the market. This paper examines whether managers consider analyst reputation in shaping their voluntary disclosure strategy. Using Institutional Investor magazine’s All-American (AA) rankings as a proxy for analyst reputation, we find that the coverage of AA analysts is positively associated with the likelihood of quarterly management earnings forecasts (MEFs). We also find that AA analysts’ forecast optimism is more positively associated with the likelihood of MEFs than non-AA analysts’ forecast optimism when the firm is covered by AA analysts. Analyses based on AA analyst coverage changes and AA status changes confirm the relation between analyst reputation and MEFs. We further find that analyst reputation influences other MEF properties, such as forecast news, bias, and revisions, and that our results are robust to alternative measures of analyst reputation. Further analyses show that market reactions at quarterly earnings announcements are more positive (negative) when firms meet/beat (miss) AA analysts’ forecasts than when firms meet/beat (miss) non-AA analysts’ forecasts. Collectively, our findings suggest that managers strategically provide voluntary forecasts by taking into account the reputation of individual analysts following their firms.     

Analyst earnings forecast precision and local advantage: evidence from American depositary receipt firms

Prior research has documented a finding that local analysts provide more accurate earnings forecasts than nonlocal analysts in many settings. However, little is known about local and nonlocal analysts’ relative earnings forecast abilities for ADR stocks. In this study, we find that the local advantage disappears for ADR stocks and that nonlocal analysts in fact outperform local ones in this case. We investigate the source of this ‘local disadvantage’ and find evidence against hypotheses based on accounting standards and exchange rates. We document that the local advantage decreases with increased investor interest in foreign firms, consistent with our nonlocal investors’ interest hypothesis.     

Earnings characteristics and analysts’ differential interpretation of earnings announcements: An empirical analysis

This study provides empirical evidence on factors that drive differential interpretation of earnings announcements. We document that Kandel and Pearson's forecast measures of differential interpretation are decreasing in proxies for earnings quality and pre‐announcement information quality. This evidence yields new and useful insights regarding which earnings announcements are less likely to generate newfound disagreement among analysts and investors. Recent research suggests that investor disagreement can increase investment risk, increase the cost of capital, and cause stock prices to deviate from fundamental value. Therefore, our results support prior intuition that increasing the quality of earnings and pre‐announcement information can improve the efficiency of capital markets.     

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.     

Short Selling Behavior and Mad Money

We examine 1,234 buy recommendations from Jim Cramer's Mad Money television show. Consistent with prior research, we report positive abnormal returns immediately after buy recommendations, followed by a reversal, indicative of an overpricing event. We also find a marked increase in short selling. Our results show a positive association between shorting and the buy recommendations even after controlling for factors shown in the literature to influence shorting. We do not find similar effects after sell recommendations. These results suggest that short sellers act to exploit short‐term overpricing arising from behavioral biases of some investors.     

Divergence of Opinion Surrounding Extreme Events

This paper examines the stock market performance of a large sample of new issues (IPOs and SEOs) following an extreme price movement during the first three years after the offering. Strong underperformance follows either a positive or negative (at least +/?15%) one‐day return event. This poor performance cannot be explained by the Fama‐French four‐factor methodology, or by the generally low stock returns of growth firms. Unlike recent issuers, non‐issuers report no poor performance following a similar extreme event using the four‐factor methodology. The extreme event date shows very high levels of turnover, a measure of divergence of opinion. Finally, there is a strong negative linkage between higher levels of divergence of opinion and subsequent stock performance.     

Conflicts of Interest and Research Quality of Affiliated Analysts in the German Universal Banking System: Evidence from IPO Underwriting

The quality of equity research by financial analysts is a prerequisite for an efficient capital market. This study investigates the quality of earnings forecasts and stock recommendations for initial public offerings (IPOs) in Germany. The empirical study includes 12,605 earnings forecasts and 6,209 stock recommendations of individual analysts for the time period from 1997 to 2004. The focus of this study is on analysing the potential conflicts of interest that arise when the analyst is affiliated with the underwriter of an IPO. In a universal banking system these conflicts of interest are usually more pronounced and therefore interesting to investigate. The empirical findings for the German financial market suggest that earnings forecasts and stock recommendations of the analysts belonging to the lead-underwriter are on average inaccurate and biased, indicating some conflicts of interest. Moreover, the stock recommendations of the analysts that are affiliated with the lead-underwriter are often too optimistic resulting in a significant long-run underperformance for the investor. In contrast, unaffiliated analysts provide better earnings forecasts and stock recommendations that result in a superior performance for the investor.     

Analyst estimation revision clusters and corporate events,Part I

Summary This paper uses periods of unusually heavy earnings estimate revision activity by analysts to assess the relative usefulness of corporate information events (CIEs) in firm valuation. Because accounting information is more readily available, newsworthy and accessible, we hypothesize that CIEs that focus on financial statement information trigger greater analyst revision activity over a shorter period of time than CIEs that offer strategic or “soft” information. Our results are consistent with this hypothesis. In Part II, we examine investor response to revision clusters that accompany different CIEs.We thank the Editor, an anonymous referee, Joe Cooper, Todd Doersch, Tony Greig, Kent Konkol and Marc Sievers for helpful suggestions and discussions. We also thank Mehmet Ozbilgin and James Su for programming during the planning phase of this project, and Jinyoung Park for research assistance during its execution. We are very grateful to Thomson Financial, CCBN and Reuters Data for providing data used in this study. Bagnoli and Watts thank the Krannert Graduate School of Management andPurdue University for financial support.     

Analyst estimation revision clusters and corporate events, Part II

Summary In Part I of this study, we evaluated the relative usefulness of information in alternative corporate information events (CIEs) to analysts by examining the frequency with which they trigger clusters of analysts’ earnings estimate revisions. In Part II, we examine investor response to various CIEs and their revision clusters. We find that stock prices react most strongly and adjust most quickly to revision clusters that accompany CIEs that focus on financial statement information. CIEs that offer strategic information take longer for analysts and investors to assimilate, and investors appear to rely heavily on later analyst revisions following such events.     

Does revenue-expense matching play a differential role in analysts’ earnings and revenue forecasts?

This paper investigates whether matching has differential implications for the accuracy of analysts' earnings and revenue forecasts. We construct a novel measure of firm-level matching and document that matching improves analysts' earnings forecasts to a greater extent than their revenue forecasts. We also document matching's differential impact on analysts' earnings and sales forecasts by proposing a new count metric capturing a wedge in the accuracy of earnings and revenue forecasts. In additional tests, we report that the differential impact of matching is less (more) pronounced in a situation where the balance sheet (income statement) orientation likely dominates. We also report that matching's differential role is weaker (stronger) when firms have high intangible intensity (analysts have appropriate resources or expertise). In short window tests, matching's role in analysts' forecast revisions is more pronounced for earnings than sales forecasts. Overall, these results show how analysts benefit from better revenue-expense matching.     

Weather and intraday patterns in stock returns and trading activity

We examine the relation between weather in New York City and intraday returns and trading patterns of NYSE stocks. While stock returns are found to be generally lower on cloudier days, cloud cover has a significant influence on stock returns only at the market open. There are significantly more seller-initiated trades when there is more cloud cover at the market open, which is consistent with the return results. Cloudy skies are associated with higher volatility and less market depth over the entire trading day. Finally, cloud cover is not significantly correlated with spread measures and turnover ratios. The findings overall suggest that weather has a significant influence on investors’ intraday trading behavior.     

Dynamics and causality in industry-specific volatility

This paper presents comprehensive empirical evidence on the dynamics and causality within 30 US industry-specific volatilities during July 1963 and June 2008. We find that linear trends are present in 17 of the 30 industry volatilities. Granger-causality tests reveal that the industry of business supplies and the industry of finance are the most important lead indicators of industry volatilities. To uncover contemporaneous causal relationships in the market, we implement an emerging data-driven method of directed acyclic graphs. The results suggest that volatility shocks originating from business supplies, machinery, and consumer goods industries are sources of risks that affect most other industries. By contrast, volatilities in the two traditionally important industries, oil and autos, do not appear to have a substantial influence on other large industries in the contemporaneous time. Finally, business equipment and services, both containing information technology components, are the most important driving forces of the industry volatility surge in the late 1990s.     

Liquidity and valuation in an uncertain world

During the 2007–2009 financial crisis there was little or no trading in a variety of financial assets, even though bid and ask prices existed for many of these assets. We develop a model in which this illiquidity arises from uncertainty, and we argue that this new form of illiquidity makes bid and ask prices unsuitable as metrics for establishing “fair value” for these assets. We show how the extreme uncertainty that traders face can be characterized by incomplete preferences over portfolios, and we use Bewley's (2002) model of decision making under uncertainty to derive equilibrium quotes and the nonexistence of trading at these quotes. We then suggest alternatives for valuing assets in illiquid markets.     

Distress risk premia in expected stock and bond returns

Prior studies find that shareholders’ strategic actions over debtholders are significant for stock prices but not for bond prices. I find that for firms with private and public debt, strategic default has no significant effect on distress risk premia in expected stock or bond returns, suggesting that the dispersion of bondholders greatly weakens the shareholder advantage effect. The shareholder advantage effect on stock prices is only significant for firms with only private debt and to some degree affected by the dispersion of stockholders and complexity in capital structure. Overall, renegotiation friction helps explain the cross-sectional implications of strategic default for stock and bond prices.     

Increased market response to earnings announcements in the 21st century: An Empirical Investigation

We examine the role of concurrent information in the striking increase in investor response to earnings announcements from 2001 to 2016, as measured by return variability and volume following Beaver (1968). We find management guidance, analyst forecasts, and disaggregated financial statement line items are more frequently bundled with earnings announcements, and each of these items explains part of the increase in market response. Furthermore, collectively, these concurrent information releases explain a substantial fraction of the increase in market response to earnings announcements since 2001. This is in contrast to the decline in market response to management guidance issued separately from earnings and the much smaller increase in market response to analyst forecasts issued separately from earnings over this time. The findings indicate that information arrival at earnings announcement dates has increased significantly over the past two decades, and that key components of this are increased disclosures by management of guidance and financial statement line items and forecasts by analysts.