Analyst Behavior Research Articles

A Discussion of “What Do Management Earnings Forecasts Convey About the Macroeconomy?”

While numerous studies in accounting and finance are devoted to predicting firm-specific earnings and understanding the forecasting behavior of analysts and management, it is unclear whether or how accounting information at the micro level can be applied to the macroeconomy. Bonsall, Bozanic, and Fischer [2012], henceforth BBF, are part of a growing literature that seeks to address this question. BBF document that firm-specific management forecast releases are significantly positively associated with announcement-window aggregate stock market returns and further show that this significant market reaction is concentrated among “bellwether” firms. In this discussion, I argue that although BBF provide convincing evidence on the presence of timely macroeconomic information in management earnings forecasts, the exact nature of this information is somewhat of a black box. BBF’s results also raise the question of how the macroeconomic information content of management earnings forecasts differs from that of realized earnings. The answers to these questions can help reconcile the significantly positive association between management forecast surprises and aggregate stock returns with the previously documented negative relation between realized earnings surprises and aggregate stock returns.

Discussion of What Do Management Earnings Forecasts Convey About the Macroeconomy?

While numerous studies in accounting and finance are devoted to predicting firm-specific earnings and understanding the forecasting behavior of analysts and management, it is unclear whether or how accounting information at the micro level can be applied to the macroeconomy. Bonsall, Bozanic, and Fischer [2012], henceforth BBF, are part of a growing literature that seeks to address this question. BBF document that firm-specific management forecast releases are significantly positively associated with announcement-window aggregate stock market returns and further show that this significant market reaction is concentrated among “bellwether” firms. In this discussion, I argue that although BBF provide convincing evidence on the presence of timely macroeconomic information in management earnings forecasts, the exact nature of this information is somewhat of a black box. BBF’s results also raise the question of how the macroeconomic information content of management earnings forecasts differs from that of realized earnings. The answers to these questions can help reconcile the significantly positive association between management forecast surprises and aggregate stock returns with the previously documented negative relation between realized earnings surprises and aggregate stock returns.

To buy or not to buy? The value of contradictory analyst signals

We study the predictive ability of individual analyst target price changes for post-event abnormal stock returns within each recommendation category. Although prior studies generally demonstrate the investment value of target prices, we find that target price changes do not cause abnormal returns within each recommendation level. Instead, contradictory analyst signals (e.g., strong buy reiterations with large target price decreases) neutralize each other, whereas confirmatory signals reinforce each other. Further, our analysis reveals that large target price downgrades can be explained by preceding stock price decreases. However, upgrades are not preceded by stock price increases, thereby demonstrating asymmetric analyst behavior when adjusting target prices to stock prices. Our results suggest that investors should treat recommendations with caution when they are issued with large contradictory target price changes. Thus, instead of blindly following a recommendation, investors might put more weight on the change in the corresponding target price and consider transaction costs.

A Tournament of Equity Analysts: Compensation, Performance, and Risk-Taking Behavior

We study the tournament behavior of sell-side analysts under proper timing and show that a strong non-monotonic relationship exists between analysts' relative forecasting performance early in the tournament and their later deviations from consensus. Given that the highest performers earn disproportionately large rewards while the lowest face the threat of termination, these top and bottom performers would be expected to herd to the consensus, relative to intermediate performers, a result that we find. Further, using exogenous shocks to the competitive pressures within tournaments, we show that an increase in the rewards, relative to punishments, increases participants' deviations from consensus.

Does XBRL Adoption Reduce the Cost of Equity Capital?

XBRL filing reduces investors` information processing cost. We find that XBRL adoption results in a significant reduction in firms` cost of equity capital and that this effect is stronger in firms with small size, high growth, low analyst coverage and illiquid stocks. We also show that firms experience an increase in analyst coverage, forecast accuracy and a decrease in forecast dispersion after XBRL adoption. Further, XBRL adoption improves firms` stock liquidity. Finally, the effect of XBRL adoption on the cost of equity capital, analyst behavior and stock liquidity is weaker for voluntary filers than for mandatory filers. In sum, we provide strong evidence supporting the argument that information processing cost significantly affects the cost of equity capital.

Discussion of “Why do pro forma and street earnings not reflect changes in GAAP? Evidence from SFAS 123R”

Barth et al. (Review of Accounting Studies, this issue, 2012) identify the perfect natural laboratory setting in which they explore important questions related to non-GAAP earnings disclosures. By focusing on a single income statement line item, stock compensation expense, they can directly compare the behavior of managers and analysts in excluding that item from GAAP earnings. Their empirical analyses indicate that managers exclude the expense for opportunistic reasons. They also conclude that analysts are more likely to exclude the expense in order to increase the predictability of current-period earnings for future earnings. I believe their evidence provides a solid contribution to the literature on non-GAAP reporting. Moreover, it provides important evidence regarding the effectiveness of SFAS 123R’s requirement for the recognition of stock compensation expense in providing relevant earnings information to stakeholders. I provide a few comments regarding aspects of the paper that require clarification or that may influence the design of future studies. Overall, I believe this research provides an important contribution to the non-GAAP literature and that it will have a significant influence on the design of future studies.

Damaged Auditor Reputation and Analysts' Forecast Revision Frequency

SUMMARY In this study, we examine the reaction of financial analysts to the events associated with the collapse of Enron and Arthur Andersen. We present evidence that the change in the frequency of downward revisions from the pre-Enron to Enron period was incrementally higher for Andersen clients than for a control sample of matched Big 4 clients. We also find evidence that Andersen clients had incrementally larger forecast errors and greater forecast dispersion than the matched control firms. Our results suggest that the damaging news about Andersen led to an abnormal increase in uncertainty about other Andersen-audited financial statements, which affected analysts' forecast activity and properties. More generally, our results suggest that analyst behavior is tempered by the analyst's perception of audit quality.

Did Regulation Fair Disclosure, SOX, and Other Analyst Regulations Reduce Security Mispricing?

Between 2000 and 2003 a series of disclosure and analyst regulations curbing abusive financial reporting and analyst behavior were enacted to strengthen the information environment of U.S. capital markets. We investigate whether these regulations reduced security mispricing and increased stock market efficiency. After the regulations, we find a significant reduction in short-term stock price continuation following analyst forecast revisions and earnings announcements. The effect was more pronounced among higher information uncertainty firms, where we expect security valuation to be most sensitive to regulation. Analyst forecast accuracy also improved in these firms, consistent with reduced mispricing being due to an improved corporate information environment following the regulations. Our findings are robust to controls for time trends, trading activity, the financial crisis, analyst coverage, delistings, and changes in information uncertainty proxies. We find no concurrent effect among European firms and a regression discontinuity design supports our identification of a regulatory effect.

To Buy or Not to Buy? The Value of Contradictory Analyst Signals

We study the predictive ability of individual analyst target price changes for post-event abnormal stock returns within each recommendation category. Although prior studies generally demonstrate the investment value of target prices, we find that target price changes do not cause abnormal returns within each recommendation level. Instead, contradictory analyst signals (e.g., strong buy reiterations with large target price decreases) neutralize each other, whereas confirmatory signals reinforce each other. Further, our analysis reveals that large target price downgrades can be explained by preceding stock price decreases. However, upgrades are not preceded by stock price increases, thereby demonstrating an asymmetric analyst behavior when adjusting target prices to stock prices. Our results suggest that investors should treat recommendations with caution when they are issued with large contradictory target price changes. Thus, instead of blindly following a recommendation, investors might put more weight on the change in the corresponding target price and consider transaction costs.

Analyst Behaviour: The Geography of Social Interaction

An analyst who works in Germany is more likely to publish a high (low) price target regarding a DAX30 stock if other Germany based analysts are also optimistic (pessimistic) about the same stock. This finding is not biased by the fact that DAX30 companies are headquartered in Germany. In times of bull markets, price targets of analysts who regularly exchange their opinion are higher correlated compared to other analysts. This effect vanishes in a bearish market environment. This suggests that communication among analysts indeed plays an important role. However, analysts’ incentives induce them not to deviate too much from the overall average during an economic downturn.

ANALYSIS OF THE INCONSISTENCY PROBLEM IN THE MODEL FOR PREDICTING "DISEASES" OF FIRMS

The development of economic-financial diagnostic models, using fuzzy logic tools, has resulted in important applications. It is possible to identify a matrix of economic-financial knowledge (Matrix R), which simulates the analyst's behaviour evaluating the health of a firm. The proposed models, from a set of symptoms and causes, use a methodology of equations resolution in fuzzy relations. In particular, we have applied their inverse problem. However, it is possible to identify some inconsistencies in the application of the resolution method, which could invalidate several elements of the matrix R. In this paper, we discuss these inconsistencies and propose a method to eliminate them. So we can find a matrix R where all its elements represent the true relationship between symptoms and causes.

Corporate Environmental Risk Exposure and Analyst Behaviour

Corporate Environmental Risk Exposure and Analyst Behaviour

Financial Analysts and Collective Reputation: Theory and Evidence

This paper studies the impact of collective reputation on the reporting strategy of experts that face conflicts of interest. The framework we propose applies to different settings involving decision makers that rely on experts for making informed decisions, in particular we consider sell-side financial analysts. We find that collective reputation has a non-monotonic effect on the degree of information revelation. In general, truthful revelation is more likely to occur when there is more uncertainty on the average ability of analysts as a group. In particular, above a certain threshold, an increase in collective reputation always makes truthful revelation more difficult to achieve. We test this theory by creating an index on the market's perception of the general reliability of analysts' recommendations. The empirical analysis provides evidence that collective reputation plays a role in determining the behavior of analysts independently of their individual reputation.

The Behavior Analyst Certification Board and International Credentialing for Behaviour Analysts

The Behavior Analyst Certification Board®, Inc (BACB®) is an international organisation that credentials behaviour analysts at two levels: Board Certified Behavior Analyst (BCBA®) and Board Certified Assistant Behavior Analyst (BCaBA®). Eligibility for certification involves appropriate supervised professional experience, approved coursework completion and a relevant academic qualification. Once eligibility criteria have been met, the relevant BACB examination may be taken at one of hundreds of sites worldwide. Individual countries may work with the BACB to develop time-limited alternative pathways for residents of the country to qualify for the BACB examinations where resources (approved courses, credentialed personnel) are limited. This paper will provide an overview of the current status of the BACB and its certificants, and include information on eligibility criteria, maintaining certification, alternative qualifying pathways and other international developments.

Sell-Side Analysts and Gender: A Comparison of Performance, Behavior, and Career Outcomes

Using a comprehensive sample of investment recommendations, we investigate differences in the performance, behavior, and career outcomes of male and female sell-side analysts. Compared to their male counterparts, we find that the recommendations of female analysts produce similar abnormal returns but with lower idiosyncratic risks. Further, gender does not seem to negatively influence female analysts’ career outcomes as defined by their star rankings and job mobility among brokerage firms. In fact, being a female analyst seems to increase the likelihood of being listed among the prestigious Institutional Investor and WSJ star analysts.

Intangible Information and Analyst Behavior

In this paper, we study whether firm intangible information affects analyst behavior. We find direct evidence that when analysts make more judgment-intensive decisions, such as issuing stock recommendations, they overweight intangible information, leading to overreaction to intangible information. On the contrary, when analysts make less judgment-intensive decisions, such as earnings per share (EPS) forecasts, there is no such evidence of overreaction. More specifically, analyst recommendations are much more sensitive to intangible information, while EPS forecasts are more sensitive to tangible information. The sensitivity of long-term growth forecasts to intangible and tangible information fall in between. We also test and find that the overconfidence bias in analyst recommendations contributes to the market overreaction to intangible information. Our results appear to be consistent with the overconfidence hypothesis put forth by Daniel and Titman (2006).

Narrative Disclosure and Earnings Performance: Evidence from R&D Disclosures

This paper examines how earnings performance relates to firms’ narrative R&D disclosure decisions. The unique nature of R&D investments and financial statements’ limited ability to communicate the value of such investments highlight the role of narrative disclosure as a supplement to the financial statements. I predict and find that current earnings performance (adjusted for R&D expense) is negatively related to the quantity of narrative R&D disclosure. Conducting a content analysis of the detail, tone, and readability of narrative R&D disclosures, I find that managers adjust R&D disclosures based on earnings performance to provide relevant information rather than to obfuscate performance. Finally, I provide evidence that market participants find narrative R&D disclosure informative because it significantly affects sell-side analyst behavior, disclosure information content, and information asymmetry.

S&P 500 Index Inclusions and Analysts’ Forecast Optimism

The authors examine analyst behavior surrounding the announcements of SP in the sample of newly added companies studied in this article, analyst earnings forecasts are found to be overoptimistic. The results also show a significant decrease in analyst forecast accuracy and higher inter-analyst forecast dispersion. These findings are important for investors who use analysts’ earnings forecasts to make investment decisions about companies that are newly added into the S&P 500. Investors should be cautious about making investment decisions based on analysts’ earnings forecasts as the forecasts tend to be upward biased (optimistic) and less accurate. The authors conclude that the credibility of analysts’ earnings forecasts for S&P 500–added firms may be altered.

Asset Pricing: Herding vs. Individual Social Interaction

The existence of influence among participants on financial markets is affirmed by the theory of behavioural finance through the consideration of sociological aspects. The aim of this paper is to empirically contrast two kinds of social influence, namely herding and individual social interaction. Herding behaviour is well known and has already been intensively examined in the context of financial markets. Individuals that herd, act like the majority does. Individual social interaction refers to the situation, where an individual is influenced by only one or few other individuals and not an aggregated outcome. Due to the lack of required data on the level of single financial market participants, their behaviour is proxied by the behaviour of sell-side analysts. This ensures a good basis for the empirical investigation of this paper. Nevertheless, the analysis of individual social interaction still is challenging. This comes through the fact, that it is necessary to know, by which analyst a particular analyst might be individually influenced. Within this paper, three approaches are presented to estimate these interdependencies. The results of all three approaches are in line and suggest that, although the influence from herding is dominant, the influence from individual social interaction plays a considerable role for the aggregated outcome of the (forecasted) asset price.

PLURALISTIC IGNORANCE AND THE PERSISTENCE OF POSITIVE ANALYST REACTIONS TO REPURCHASE PLANS.

The article examines how a social psychological bias that is referred to as pluralistic ignorance may result in behavioral conformity and isomorphism in the behavior of security analysts. Pluralist...