New evidence on price impact of analyst forecast revisions

Previous research shows a positive relationship between consensus forecast revisions and stock returns in developed markets. We obtain new evidence from four major Asia-Pacific markets that suggest that abnormal returns are related to latest forecast revisions. The price impact of negative revisions is consistently stronger than that of the positive revisions. We also found considerable differences in price impact between developed and emerging markets for positive revisions, while no such difference is detected for negative revisions. The latest forecast revisions and category of analysts (those working in international broking firms) appear to be two key determinants of abnormal stock returns.     

Analyst characteristics, timing of forecast revisions, and analyst forecasting ability

We first examine whether analysts with certain characteristics that prior research has identified are related to superior forecasting ability systematically time their forecast revisions later in the fiscal quarter. We then examine whether this superior ability persists after controlling for the timing advantage by using relative forecast error, a measure that largely eliminates the timing advantage of recent forecasts. Using a sample of quarterly earnings forecast revisions over the 20-year period from 1990 to 2009, we find that analysts with more firm-specific and general experience and more accurate prior-period forecasts, analysts employed by larger brokerage firms, and analysts who follow fewer industries and companies tend to revise forecasts later in the quarter. We also find that analyst characteristics that are positively correlated with revision timing are negatively related to relative forecast errors. These results are consistent with analyst characteristics being useful proxies for analyst forecasting ability and analysts with greater ability revising forecasts later in the quarter.     

An examination of the effects of management earnings forecast form and explanations on financial analyst forecast revisions

Using a sample of 978 quarterly management earnings-per-share forecasts made during the period 1993 to 1999, we document that financial analyst revisions to management earnings forecasts are a function of management forecast form. More precise forecasts (measured three different ways) lead to greater revision of financial analyst consensus EPS forecasts for a given level of unexpected earnings as predicted by Kim and Verrecchia (1991) and Bayesian adjustment models. Also, consistent with our arguments, maximum forecasts are interpreted as bad news by analysts. Our results, while consistent with theory, are inconsistent with recent experimental studies which do not reject the null hypothesis of no effect of management earnings forecast form on the association between unexpected earnings and financial analyst forecast revisions. We also re-examine Baginski, Hassell, and Kimbrough's (2004) finding that attributions used to explain management forecasts affect the reaction to the forecast using analyst data. Consistent with their findings using stock prices, the attribution presence (especially external attributions) increases financial analyst revisions pursuant to management forecasts.     

Cash holdings and the bargaining power of R&D-intensive targets

Prior literature suggests that R&D-intensive firms hold large amounts of cash due to financing constraints. This paper examines whether such firms could also use cash holdings as a strategic bargaining tool in M&A transactions. Using a large sample of takeover bids announced between 1980 and 2012, we demonstrate that cash holdings positively impact R&D-intensive targets’ takeover premiums and announcement-period abnormal returns. These effects disappear in non-R&D-intensive firms. Controlling for various endogeneity and financing concerns, we also find that R&D-intensive firms build up cash holdings in anticipation of becoming a takeover target. Further analysis indicates that in R&D-intensive firms, such cash holdings are valued highly by the market. Taken together, our findings shed new light on the strategic bargaining role of corporate cash holdings in the outcomes of acquisitions targeting R&D-intensive firms.     

Determinants of the informativeness of analyst research

We examine cross-sectional determinants of the informativeness of analyst research, i.e., their effect on security prices, controlling for endogeneity among the factors affecting informativeness. Analyst reports are more informative when the potential brokerage profits are higher (e.g., high trading volume, high volatility, and high institutional ownership) and lower when information processing costs (e.g., more business segments) are high. We also find that the informativeness of analyst research and informativeness of financial statements are complements.     

Access to management and the informativeness of analyst research

We examine whether access to management at broker-hosted investor conferences leads to more informative research by analysts. We find analyst recommendation changes have larger immediate price impacts when the analyst?s firm has a conference-hosting relation with the company. The effect increases with hosting frequency and is strongest in the days following the conference. Conference-hosting brokers also issue more informative, accurate, and timely earnings forecasts than non-hosts. Our findings suggest that access to management remains an important source of analysts? informational advantage in the post-Regulation Fair Disclosure world.     

Informative or distracting: CSR disclosure of peer firms and analyst forecast accuracy

We investigate the relationship between the CSR disclosure of peer firms and the analyst forecast accuracy of the focal firm. We find a negative association between peer CSR disclosure and analyst forecast error of the focal firm, indicating that peer CSR disclosure is informative. This negative association is more pronounced when the information environment of the focal firm is worse, when the correlation in fundamentals between the focal firm and its peers is higher, when the business of the focal firm is less complex, when the focal firm has more expert analyst coverage, when the focal firm's financial performance is more sensitive to CSR engagement, or when the quality of peer CSR disclosure is higher. Overall, we show that peer CSR disclosure conveys value-relevant information about the focal firm. Our study enriches the literature on both analyst forecasts and peer information, and we also provide important implications for practitioners in understanding the role of CSR disclosure in capital markets.     

Stock market valuation of R&D spending of firms acquiring targets from technologically abundant countries

In this paper, we aim to extend the internalization theory by Buckley and Casson [Buckley, P.J., Casson, M., 1976. The Future of Multinational Enterprise. Holmes & Meier, New York] and Caves [Caves, R.E., 1971. International corporations: the industrial economics of foreign investment. Economica 38, 1–27] in two respects. First, we hypothesize that synergies arising from a technology-oriented cross-border M&A increase the stock market value of an acquirer’s R&D spending. Second, we hypothesize that an acquirer’s access to a country with more favorable R&D environment through the target firm is the main source of synergy arising from intangibles in these M&As. Our empirical results of analyzing data from 10 most R&D active countries in Europe are consistent with these hypotheses and support our extension of the internalization theory. Specifically, we find that multinationality of a firm with intangible assets as such does not add value to R&D, but the combination of its own R&D with that of a firm located in a country with highly favorable R&D environment.     

The ownership structure of UK firms and the informativeness of accounting earnings

This paper provides evidence that in the UK, a firm's ownership structure is related to the informativeness of its accounting earnings for price. Evidence is reported that concentrated outside ownership is negatively related to the contemporaneous price-earnings association. This is interpreted as indicative of more non-accounting information being collected and disseminated for firms whose ownership includes large outside (non-managerial) blocks and a consequential loss of informativeness of contemporaneous accounting earnings. Having controlled for the information environment, we provide evidence that the overall relation between return and earnings is attenuated for firms with diffuse outside ownership. This is interpreted as evidence of the market anticipating opportunistic managerial manipulation of earnings when outside ownership is diffuse.     

Disposition effect and analyst forecast dispersion

Behavioral finance theories posit that behavioral biases are more pronounced when there is higher information uncertainty about fundamentals. This paper examines the relation between the disposition effect, the tendency to ride losses and realize gains, and dispersion in financial analysts’ earnings forecasts for a sample of large U.S. discount brokerage accounts from January 1991 to December 1996. I find that the disposition effect is exacerbated in stocks with higher analyst forecast dispersion. In particular, the disposition effect is 10% in stocks in the highest forecast dispersion quintile and not significant in the lowest forecast dispersion quintile. The driving factor behind these findings is investors’ higher propensity to realize gains when facing higher information uncertainty. The results are robust to controlling for firm size, analyst coverage, idiosyncratic volatility, turnover, and past market-adjusted returns. The results provide supportive evidence for a behavioral bias explanation of the disposition effect consistent with mean-reversion beliefs for winners and loss actualization avoidance for losers.     

The outperformance of family firms: the role of variance in earnings per share and analyst forecast dispersion on the Swiss market

Recent studies provide empirical evidence that family firms are outperforming their non-family counterparts in terms of stock market performance. For the Swiss stock market we find that family firms indeed outperform their non-family counterparts after controlling for firm size and beta. In addition, our data shows that family firms display more stable earnings per share in contrast to their non-family counterparts. Furthermore we find that the variance of earnings per share positively affects analyst forecast dispersion. According to anomaly literature, lower analyst forecast dispersion has been found to induce higher excess return, which our data supports for the Swiss stock market. By linking variance of earnings per share, analyst forecast dispersion and stock performance we provide an insightful explanation for the excess stock market returns of family firms. In addition, our text extends the theory of dispersion effect with an additional empirical element, the variance of earnings per share.      

Business strategy,stock price informativeness,and analyst coverage efficiency

We examine how business strategy affects stock price informativeness which in turn influences analyst coverage efficiency. Using stock price synchronicity and the probability of informed trading as proxies for stock price informativeness, we show that stock prices of prospectors are less informative than those of defenders. Next, we explore two channels through which business strategy influences analyst coverage efficiency. We first test and find support for an information transfer channel, i.e., the higher stock price synchronicity of prospectors facilitates more information transfer by analysts, resulting in higher analyst coverage efficiency of prospectors than defenders. Next, we test and find support for an informed trading channel, i.e., the higher probability of informed trading on stocks of defenders intensifies competition between informed traders and analysts. Such competition adversely affects analyst coverage efficiency, leading to lower analyst coverage efficiency of defenders than prospectors. Our findings are robust to an array of robustness checks including 2SLS/IV tests, differences‐in‐difference tests, and high‐tech industry sensitivity analyses.     

Discontinued operations and analyst forecast accuracy

Review of Quantitative Finance and Accounting - The Financial Accounting Standards Board requires separate reporting of discontinued operations within the income statement to provide better...     

Brokerage M&As and the peer effect on analyst forecast accuracy

We examine whether the impact of a change in the number of analysts a brokerage firm employs has an asymmetric effect on the forecasting ability of superior and inferior analysts. Specifically, we show that following brokerage M&As only superior analysts benefit from a rise in having a larger number of peers. In addition, we find that the market does not account for the improved performance among superior analysts, and argue that this creates an opportunity for investors to capitalize on this.     

The value relevance of R&D across profit and loss firms

We examine whether the valuation relevance of R&D documented for loss firms extends to profit firms. We use the residual-income valuation model and show that the valuation multiplier on R&D expenditures is likely to be negative (positive) for profit (loss) firms. This occurs because the linear information dynamics assumption of the residual-income model is more appropriate for profit firms than loss firms. Earnings of profit firms are likely to contain information on the future benefits of R&D activity, however, earnings of loss firms do not contain such information. The empirical evidence confirms our predictions for profit and loss firms. An important implication of our findings is that understanding the role of the R&D expense line item in valuation across firms and within firms, across time depends on whether the linear information dynamics assumption of the residual-income model is applicable for the sample of firms under investigation.     

Capitalisation of R&D and the informativeness of stock prices: Pre- and post-IFRS evidence

We examine whether requiring (IFRS) versus allowing (UK GAAP) conditional capitalisation of development expenditure affects the extent to which capitalisation conveys more information about future earnings, relative to expensing. We show that capitalisation results in current returns incorporating more future earnings information than expensing under UK GAAP but not under IFRS. i.e., the amount of information incorporated into market prices of capitalisers is the same as that from firms expensing R&D under IFRS. This result holds irrespective of a firm’s earnings management incentives or strength of corporate governance for the period under IFRS. We argue that this is because investors experience greater uncertainty regarding the realisation of future economic benefits associated with the development costs capitalised in the post-IFRS period. Consistent with this, we do find a positive association between capitalised R&D and future earnings variability in the post-IFRS period only, as well as short-term positive abnormal returns for capitalisers relative to expensers in the pre-IFRS period only. Overall, these findings suggest that when moving away from a standard that offers an overt option to capitalise or expense, capitalisation comes with greater uncertainty, which is resolved only in the long term.     

Trading incentives to meet the analyst forecast

We examine stock sales as a managerial incentive to help explain the discontinuity around the analyst forecast benchmark. We find that the likelihood of just meeting versus just missing the analyst forecast is strongly associated with subsequent managerial stock sales. Moreover, we provide evidence that managers manage earnings prior to just meeting the threshold and selling their shares. Finally, the relation between just meeting and subsequently selling shares does not hold for non-manager insiders, who arguably cannot affect the earnings outcome, and is weaker in the presence of an independent board, suggesting that good corporate governance mitigates this strategic behavior.

On the investment value of sell-side analyst recommendation revisions in the UK

Review of Quantitative Finance and Accounting - This study conducts a comprehensive investigation into the investment value of sell-side analyst recommendation revisions in the UK, using a unique...     

The valuation relevance of R&D expenditures: Time series evidence

The literature on the valuation relevance of R&D investments is based primarily on cross-sectional regressions or panel data regressions with time and firm (or industry) fixed effects such that the parameters relating R&D to market value are cross-sectionally constant. In an alternative approach, this paper investigates the value relevance of R&D investment using an earnings-based time series valuation model. Model parameters are estimated for each firm separately. In contradistinction to the results obtained from cross-sectional and fixed effects panel models, this study finds weak empirical support at best for the value relevance of R&D expenditures at the firm level.     

Distress risk puzzle and analyst forecast optimism

Review of Quantitative Finance and Accounting - A general consensus in the literature is that financial analysts make optimistic forecasts. That is, they tend to underreact to negative but...