Equity Analysts Research Articles

Climate Change, Firm Performance, and Investor Surprises

We link records of firm performance, equity analyst forecast errors, and stock returns around companies’ earnings announcements to firm-specific measures of heat exposure for more than 17,000 firms in 93 countries from 1995 to 2019. We find that increased exposure to extremely high temperatures reduces firms’ revenues and operating income. A one-standard-deviation increase in the number of hot days decreases revenues (operating income) by 0.6% (1.8%) of the average quarterly revenue (operating income). Moreover, we provide evidence that increased heat exposure impacts negatively on firm financial performance relative to analyst predictions and on earnings announcement returns. These findings indicate that capital market participants do not fully anticipate the economic consequences of heat as a first order physical climate risk. This paper was accepted by Colin Mayer, Special Section of Management Science on Business and Climate Change. Funding: N. Pankratz gratefully acknowledges financial support from the French Social Investment Forum and the Principles for Responsible Investment [PhD Research Grant 2017]. Supplemental Material: Data are available at https://doi.org/10.1287/mnsc.2023.4685 .

Surveillance archive: using reports in business history

ABSTRACT In a narrow sense, this essay is meant to encourage business historians to consider (and reconsider) the variety of public and private reports, which can provide insights into the operation of firms and industries. U.S. bank examiner reports tell us about how nineteenth century banks operated within a Republican political economy; European Union reports shine light on the differences and similarities between firms operating in various national markets and their relationship to increased economic integration; equity analyst reports present a forensic financial analysis while also revealing a company’s history. More broadly, this essay is also an invitation to reflect on reports as a nexus of surveillance and power. Indeed, such paperwork is power (the tricky bit is figuring out just what sort of power it is, and who wields it).

The Field of Investment Advice: The Social Forces that Govern Equity Analysts

The Field of Investment Advice: The Social Forces that Govern Equity Analysts

A Case Study on Valuation of Tata Motors Ltd.

In this case study, the fundamental value of Tata Motors has been calculated using one of the most popular techniques of valuation, Discounted Cash Flow Valuation. Ravi Nigam, who is an equity analyst has been given the task to calculate the value of Tata Motors. The first step taken to calculate the value was to prepare the forecasted income statement and balance sheet. In order to do so, the first task was to forecast the sales of Tata Motors for the next coming five years. On the basis of forecasted sales, various items of expenses like the cost of goods sold and selling, general & administrative expenses were forecasted. Subsequently, Free Cash Flow to the Firm was calculated which was discounted by a weighted average of the cost of capital to arrive at the present value of Tata Motors. The terminal value and its present value has been also calculated to complete the valuation process.

Equity analyst social interactions and geographic information transmission

Equity analyst social interactions and geographic information transmission

Save Money to Lose Money? Implications of Opting Out of a Voluntary Audit Review for a Firm’s Cost of Debt*

ABSTRACT An audit review (AR) is a mechanism used by boards to assess the quality of interim financial reports on a timely basis. In Canada, the AR is voluntary, with listed firms mandated to disclose when they choose to not purchase additional audit verification. Given the relatively low cost of an AR, opting out of it can be regarded as a negative signal, especially in the context of lenders’ sensitivity to downside risk. Using a sample of 7,585 firm-year observations from 1,616 public firms in Canada over the period 2004-2015, we document that firms without a voluntary AR have a higher cost of debt than firms with an AR. Furthermore, after firms opt out of the AR, the increase in the cost of debt is accompanied by a rise in discretionary abnormal accruals and managers’ stock-based compensation. Moreover, no-AR firms are more likely to reduce post-switch private borrowing and have lower equity analyst following. Our study is the first to document that although listed borrowers that opt out of an AR have a higher cost of debt financing, they are concurrently able to engage in more earnings management and grant their managers higher stock-based compensation because of lower external monitoring.

The Effect of Asymmetric Information on the Pricing of Equity Issuance

Purpose: This paper examined the adverse selection in the market for seasoned equity issuance.
 Methodology: The asymmetric information explained the price reduction at the date of equity issuance. In particular, equity issuance tended to follow credible information releases since companies issued equity when the market was the most informed about the quality of their firms. The paper exploited brokerage mergers as a quasi-natural experiment that increased information asymmetry through their effect on the extent of research coverage by sell-side equity analysts.
 Findings: The broker mergers unexpectedly terminated brokers operation, and the level of analyst coverage decreased for the firms previously covered by these analysts. This paper showed that the cumulative abnormal return was positive around the date of equity issuance when asymmetric information increased and more substantial for stocks that lost analyst coverage relative to the stocks that never lost any coverage. Moreover, affected companies by the brokerage mergers issued more equity after the events compared to the control group. This paper showed the causal impact of losing analyst coverage on price at the time of equity issuance.

Do Security Analysts Discipline Credit Rating Agencies?

Abstract Credit ratings of corporations are biased, but the forces driving this bias are unclear. We argue it would be difficult for rating agencies to issue high grades for a firm’s debt when there are a lot of objective equity analyst reports about the firm’s earnings that are informative about its default. We find that an exogenous drop in analyst coverage leads to greater optimism-bias in ratings, especially for firms with little bond analyst coverage and those that are close to default. This coverage-induced shock leads to less informative ratings about future defaults and downgrades and more subsequent bond security mispricings. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

How does the financial market influence firms' Green innovation? The role of equity analysts

AbstractThis paper investigates how equity analysts influence firms' green innovation across different financial markets. Using a unique data set consisting of more than 6000 listed firms across 56 different countries, we find that corporate green innovation is positively associated with the number of equity analysts following the firm. We attribute this result to the informational role of analysts, which encourages managers to invest more in eco‐innovation. However, when we divide the full sample into two subsamples based on whether covered firms are incorporated in market‐oriented or bank‐oriented countries, we find that the association between firm's green innovation and analyst coverage becomes negative in the case of market‐oriented financial systems. We argue that potential explanations for this result rely on the differences occurring among market‐oriented and bank‐oriented systems in terms of listed companies' ownership structure and the prevalence of arm's length transaction banking rather than long‐term lender–borrower relationships.

A Star Is Born: The Relationship Between Performance and Achieving Status Through Certification Contests in the Context of Equity Analysts

We investigate how the relationship between status and performance decouples over time by addressing two questions: (1) how performance affects the likelihood that an actor achieves high status and (2) how achieving high status affects the actor’s subsequent performance. In doing so, we focus on the role repeated certification contests play, where evaluators assess actors’ performance along particular dimensions and confer high status on the contest winners. Using the context of sell-side (brokerage) equity analysts and the “All-Star” list from Institutional Investor magazine, we first investigate whether analysts who make the All-Star list are more likely to produce accurate and/or independent forecasts. Then, we investigate analyst performance after recent and multiple wins. Our results demonstrate the decoupling of status and performance over time and the roles played by both the high-status actor and the social evaluators conferring their status. Whereas analyst performance increases the likelihood of being designated an All-Star, recent and multiple All-Star designations differentially affect both how subsequent performance is assessed, and how the All-Star analysts subsequently perform. In the short term, achieving high status can increase performance and solidify an analyst’s status position; however, in the long term, it can lead to lower performance and eventually result in status loss, which further erodes performance.

Discourse Uncertainty and Belief Polarization in Financial Markets: Evidence from Equity Analysts

Discourse Uncertainty and Belief Polarization in Financial Markets: Evidence from Equity Analysts

Female Equity Analysts and Corporate Environmental and Social Performance

Female Equity Analysts and Corporate Environmental and Social Performance

Cultural Biases in Equity Analysis

ABSTRACTA more positive cultural trust bias by an equity analyst's country of origin toward a firm's headquarter country is associated with significantly more positive stock recommendations. The cultural bias effect is stronger for eponymous firms whose names mention their home country and varies over time, increasing with negative sentiment. I find evidence of a negative North‐South bias during the European debt crisis and United Kingdom‐Europe divergence amid Brexit. Share price reactions to recommendations by more biased analysts are weaker, and more biased recommendations are worse predictors of monthly stock returns. More positively biased analysts also assign higher target prices.

Personal Financial Distress, Limited Attention

ABSTRACTBy linking sell‐side equity analysts to their deed records and LinkedIn profiles, I show that analysts with higher exposure to negative wealth shocks issue more pessimistic and less accurate forecasts. The effects are stronger when analysts have higher leverage in their homes and face career concerns. I also find that stocks recommended by exposed analysts underperform those of nonexposed counterparts, by an amount that is significant and economically large in magnitude. The results remain robust to unobserved skill differences, the potential endogeneity of housing prices, the self‐selection of analysts into neighborhoods with certain traits, and placebo tests where housing wealth shocks are randomized across analysts. Collectively, this study provides new evidence on if and how personal wealth shocks impact analysts' work productivity and forecast behavior.

CEO regulatory focus and myopic marketing management

This study details the mechanisms on how CEO regulatory focus affects the salience of the gains versus losses involved in myopic marketing decision-making, and how such CEO psychological attributes interact with internal equity-based compensation, external pressure from equity analysts, and environmental turbulence to affect firms’ myopic marketing management propensities. We find that when faced with short-term earnings pressure to meet earnings expectations and when time is no longer a resource, predominantly promotion-focused are more likely to engage in myopic marketing management to benefit from the temporary stock price increase, which comes from meeting or beating earnings expectations. Conversely, predominantly prevention-focused CEOs are less prone to such short-termist actions which results in long-term value loss. For the moderating variables, we find that: (1) equity-based compensation tends to attenuate myopic marketing tendencies of promotion-focused CEOs but have no impact on prevention-focused CEOs, (2) whether equity analysts improve monitoring or aggravate short-term earnings pressure depends on the CEO’s regulatory focus, and (3) environmental turbulence does not increase the myopic marketing management tendencies of predominantly promotion-focused CEOs but rather intensifies the relunctance of prevention-focused CEOs to take short-termist actions. We further find that myopic marketing management mediates the impact of CEO regulatory focus on future firm performance. These findings have important implications for firms and boards when selecting new CEOs and structuring the compensation of existing CEOs. Firms need to simultaneously consider the fit between the CEOs’ regulatory focus, firms’ needs, the business environment, as well as CEO compensation structure.

Noncompliance with SEC regulations: evidence from timely loan disclosures

We use required 8-K filings around major borrowings to shed light on firms’ choices of whether to comply with SEC disclosure rules. Exploiting within-firm variation, we find that firms are more likely to hide loans with high spreads and tight financial covenants. We further find that firms appear to exploit the ambiguity of the definition of materiality, as they are more likely to selectively disclose (hide) “immaterial” loans when interest rates are low (high). Firms are less likely to hide loans when investors anticipate borrowing during asset acquisition, when firms are followed by more equity analysts or receive more investor attention, and when the firms’ stock prices are more volatile. Lastly, we provide evidence that the SEC does not rigorously enforce compliance with 8-K loan disclosures.

When Do Associate Analysts Matter?

Although extant literature investigates the role of sell-side equity analysts in capital markets, most studies do not consider that sell-side equity analysts often work in hierarchical teams. Lead analysts manage a team of associate and junior analysts who participate in the team’s tasks. Building on the delegation theory in the management literature, we hypothesize and find a division of labor between lead and associate analysts, where lead analysts are more likely to delegate tasks (1) that are less significant, (2) that are simpler, (3) when the workload of the lead analyst increases, and (4) when the associate analyst is more competent. Our results further suggest that associate analysts play a significant role in forecasting. By contrast, lead analysts are the main contributors to the qualitative aspects of analyst reports and are more likely to participate in earnings conference calls. Overall, our study documents the significant role of associate analysts in forecasting and the division of labor between lead and associate analysts. This paper was accepted by Brian Bushee, accounting.

Government Subsidisation and Shareholder Wealth Impact: Evidence from Malaysia

This paper investigates the shareholder wealth impact of government investment in listed companies (and by extension, government subsidisation of those companies), using data from Malaysia. We distinguish two overlapping categories of government-related investors: those whose principal mission relates to economic policy and those whose principal mission relates to social policy. The methodology entails Ordinary Least Squares regressions. There are two dependent variables measuring management success at generating shareholder wealth: an intrinsic value surrogate and return on equity. The final sample comprises 1732 company–year observations from the investigation period 2011–2014. The evidence indicates that companies subject to shareholder by a government-related investor with a social (economic) policy mission are more (less) successful at generating wealth than companies without any government shareholding at all. The findings indicate that for companies subject to ownership by government investors with a mission related to economic policy, government subsidies are wealth-enhancing, subject to diminishing marginal returns beyond a threshold level of government shareholding. The research design reflects adaptations to the Malaysian institutional setting via choice of control variables and usage of data from a leading Malaysian equity analyst.

Equity analysts' recommendation revisions and corporate bond price reactions

This paper analyzes bond price reactions to examine the information spillover from equity analysts' recommendation revisions into the bond market. We document a positive relation between bond price reactions and recommendation revisions. On average, bond prices react positively to recommendation upgrades and negatively to recommendation downgrades. The strongest reactions are observed among speculative-grade bonds. While, on average, bond price movements are in the same direction as analysts' recommendation revisions, these revisions can also lead to bond price reactions in the opposite direction to share price reactions. We find evidence of negative bond return reactions relative to share price reactions among firms that are closer to distress, especially when they have high levels of institutional ownership or discretionary accruals. The negative relative price reaction between shares and bonds indicates that equity analyst recommendations sometimes carry security-specific information.

Financial Analysis in Banking: The Challenge of Segment Reporting*

ABSTRACTAn equity analyst at Q&M Independent Research Corporation is assessing the financial and business prospects of two Canadian banks: Bank of Montréal and Canadian Imperial Bank of Commerce. Relying on recent information provided in the financial statements and proxy circulars from both banks, the analyst faces some challenges in performing a prospective analysis, a key input to any valuation model. The case highlights the cost‐benefit analysis of disclosure that banks may perform when applying IFRS 8 – Operating Segments. The case also illustrates the challenges that segment disclosure poses to financial analysts and investors as they attempt to forecast a bank's earnings and to perform a valuation. Furthermore, the case develops the process by which a bank's business model is linked with its financial reporting and, ultimately, its valuation.