Individual Analysts Research Articles

Monetary Policy Surprises and Inflation Expectation Dispersion

Anchoring of inflation expectations is of paramount importance for central banks’ ability to deliver stable inflation and minimize price dispersion. Relying on daily interest rates and inflation forecasts from major financial institutions in the United States, we calculate monetary policy surprises of individual analysts as the unexpected changes in the federal funds rate before the meetings of the Federal Reserve Board. We then assess the effect of monetary policy surprises on the dispersion of inflation expectations, a proxy for the extent of anchoring, which is based on the same analysts’ inflation projections submit-ted after the Fed meetings. With an identification strategy that hinges on a tight window around the Fed meetings, we find that monetary policy surprises lead to an increase in the dispersion of inflation expectations up to nine months after the policy meeting. We rationalize these results with a partial equilibrium model that features rational expectations and sticky information. When we allow the degree of information rigidity to depend on the realization of firm-specific shocks, the theoretical results are qualitatively consistent and quantitatively close to the empirical evidence.

Michael Polanyi and the epistemology of intelligence analysis

ABSTRACT Epistemology is at the heart of the intelligence analysis profession. Michael Polanyi’s concepts of ‘tacit knowing’ and ‘personal knowledge’ offers a more precise account for understanding the tacit process of skilfully solving problems of epistemic complexity, along with a deeper appreciation for the personal aspect of knowledge. Examining this conceptual framework offers an opportunity for re-cognizing key features of this profession, especially the personal and tacit dimensions involved in analysis. These examinations aim to contribute towards the training and education of analysts, along with offering the individual analyst a detailed language and logic for reflection and self-exploration regarding their practice.

Analyst Incentives and Stock Return Synchronicity: Evidence from MiFID II

Implemented in 2018, MiFID II changed sell-side analyst incentives in Europe, forcing analysts to justify the value they add. While the number of analysts decreases, the average stock return synchronicity with the market also decreases, implying an improvement in price informativeness. The decrease in synchronicity is larger for firms that are more important for the analysts and brokers covering them. It is also asymmetric and substantially larger for downside market movements. Our results suggest that, by changing incentives, MiFID II not only improves the quality of individual analyst work, but also achieves an improvement in the aggregate stock price informativeness.

Analyst underreaction and the post‐forecast revision drift

AbstractThe post‐forecast revision drift (PFRD), the phenomenon of delayed stock price reactions to analyst forecast revisions, is a well‐documented market anomaly. Prior research attributes PFRD to underreaction by investors to analyst forecast revisions. This study investigates the role of the analyst forecast revision process itself in the PFRD anomaly. Using a large sample of US firms, we confirm prior findings of a positive serial correlation (momentum) in individual analysts’ revisions to their earnings forecasts and, based on both indirect and direct tests, document a positive association between this momentum and PFRD. Further analyses reveal that both the forecast revision momentum and PFRD vary in similar ways with respect to the nature of the news driving the revisions and the information environment. Collectively, our findings show that underreaction by individual analysts in the forecast revision process is an important contributor to the PFRD phenomenon.

Change across a completed analysis assessed using a modified Three-Level Model

The authors present their design for a clinical teaching exercise to study transformation in psychoanalysis. They chose a completed analysis from which to select the sessions retrospectively so that the clinical review exercise would not influence ongoing analytic process. The co-authors selected three tranches of clinical material, a few years apart, to be presented by the analyst. They studied the material with colleagues in the impressionistic manner of traditional clinical review, and then subjected it to more systematic examination, using a modified application of the Three-Level Model (3-LM) for assessing change. Their prediction was that the use of the 3-LM model could amplify the clinical impressions of the individual analyst and provide a way of being more specific about the changes, if any, that had occurred, and arrive at which theories best explained those changes.

The effects of MiFID II on sell-side analysts, buy-side analysts, and firms

This paper provides early but broad empirical evidence on MiFID II, which requires investment firms to unbundle investment research from other costs they charge to clients. Employing difference-in-differences matched-sample research designs with firm fixed effects, we find a decrease in the number of sell-side analysts covering European firms after MiFID II implementation, particularly for firms that are less important to the sell-side. However, research quality improves; specifically, individual analyst forecasts are more accurate and stock recommendations garner greater market reactions. In addition, sell-side analysts seem to cater more to the buy-side after MiFID II by providing industry recommendations along with stock recommendations. Importantly, we predict and find evidence that buy-side investment firms turn to more in-house research after MiFID II implementation. Equally interesting, buy-side analysts increase their participation and engagement in earnings conference calls, compared to the control group. We find some evidence that stock-market liquidity decreases post MiFID II.

Collaborative study on the determination of 7-aminoflunitrazepam in urine by GC-MS

A previously published gas chromatography-mass spectrometry (GC-MS) method for the analysis of 7-aminoflunitrazepam (7-amino-FM2) in urine was subjected to an inter-laboratory collaborative study. The method was rigorously defined in terms of performance requirements, yet allowed some degrees of flexibility to individual analysts. The collaborative study followed the guidelines provided by the Association of Official Analytical Chemists International (AOAC International). Each of nine drug-abuse urine testing laboratories in Taiwan participated in the study to analyze 3 samples in duplicate. The repeatability relative standard deviation (RSDr) and the reproducibility relative standard deviation (RSDR) of the measurements of 7-amino-FM2 in urine were determined to be less than 9.91% and 14.84%, respectively. The method showed acceptable reproducibility, as evidenced by HORRAT values of 0.6 to 0.7. The method was thus proposed to be used by the testing laboratories in Taiwan.

Exploring pre-analytical factors for the optimisation of serum diagnostics: Progressing the clinical utility of ATR-FTIR spectroscopy

Data quality and reproducibility are vital for robust, reliable and consistent diagnostic techniques within clinical environments. Most variance within clinical laboratories occur within the pre-analytical phase, prior to obtaining and analysing data. Herein, we investigate pre-analytical considerations for the spectroscopic analysis of blood serum for the purpose of clinical diagnostics.Variables within sample collection, storage and preparation are explored in order to evaluate their effects on the spectral outcome, including; differences between sample collection tubes, centrifugal speed and time, short and long-term storage conditions, individual analyst technique, sample volumes, environment of sample batches, as well as various drying techniques. Exploratory data analysis using principal component analysis was implemented to unearth spectral variance not immediately observable.Minor spectral variations were observed within each experiment; however, these were not considered significant differences as a result of these varying experimental factors. Variation between different operator techniques when preparing samples was observed, yet can be resolved with appropriate standard operating procedures, regardless of other factors such as sample volume and storage conditions. The findings within this report suggest that experimental variations within a laboratory, or between different laboratories, does not significantly affect the spectral outcome, and with good laboratory practice and careful sample handling results should be consistent and reliable.

Individual analysts, stock return synchronicity and information efficiency

To shed light on whether and how effective are analysts as information intermediaries, we construct the information efficiency indicator and investigate the information performance of China's analysts from the perspective of heterogeneous individual analysts based on stock return synchronicity. Furthermore, we verify the rationality and generalization of information efficiency based on the regression of primary and expanded indicators on stock characteristics and analyst characteristics. Our indicator provides a novel method to accurately measure analysts' information performance from the level of individual analysts rather than from a homogeneous community or heterogeneous group and highlights the analysts' roles as the information intermediaries.

Cultural diversity on Wall Street: Evidence from consensus earnings forecasts

We examine how cultural differences among agents influence the aggregate outcome of a common forecasting task. Using both exogenous shocks to sell-side analyst diversity and panel regression methods, we find that increases in analyst cultural diversity positively affect the quality of the consensus earnings forecast. We further provide evidence on the potential mechanisms underlying this result by showing that cultural diversity is associated with improvements in individual analyst forecasts, greater analyst conference call participation and interaction, and greater diversity in analyst education backgrounds and professional interests. Overall, our results indicate that greater cultural differences among agents producing an aggregate forecast are associated with a higher quality consensus forecast.

What Do Analysts’ Provision Forecasts Tell Us About Expected Credit Loss Recognition?

We examine the incremental predictive ability and information content of analysts’ provision forecasts to explore the potential effects of the FASB’s new current expected credit loss (CECL) accounting method. Controlling for the recognized loan loss provision, consensus analyst provision forecasts are incrementally associated with future non-performing loans (NPLs) and equity markets returns. This incremental association is increasing in banks’ unconstrained ability to estimate future losses as evidenced by their loan fair value disclosures and the extent of the constraints imposed by the incurred loss model measured by the fraction of heterogeneous loans individually reviewed for impairment. For a sample of analysts that also forecast NPLs, the association between the individual analyst’s provision forecast and future NPLs is increasing in the analyst’s comparative NPL forecasting accuracy. Finally, we find that the association between the analyst’s provision forecast and future NPLs is increasing in EPS forecast errors but decreasing in target price forecast errors. Together these results suggest that the reported provisions under the current incurred loss model do not fully incorporate banks’ information about future losses and that the extent to which this occurs depends both on banks’ ability to forecast expected losses and the constraints imposed by the incurred loss model. These results suggest that analysts forecast future losses beyond those reflected in the recognized provision and that the incremental information in these forecasts and potential CECL provision timeliness effect is greater when the constraints imposed by the incurred loss model are greater.

Individual Analysts' Stock Recommendations, Earnings Forecasts, and the Informativeness of Conference Call Question and Answer Sessions

ABSTRACT This paper deepens our understanding of the anatomy of an earnings conference call. Prior research indicates that, on average, analysts providing bullish stock recommendations or beatable earnings forecasts benefit from greater access to corporate management. Therefore, we analyze whether and to what extent individual analysts' ex ante stock recommendations and earnings forecasts affect the information content of analyst-manager conversations. Using intraday absolute stock price reactions around specific analyst-manager dialogs to measure informativeness, we find that manager dialogs with bearish analysts whose forecasts are missed are more informative. Such analysts engage in longer conversations with more back-and-forth iterations and exhibit a more negative tone, relative to bullish analysts that provide beatable forecasts. Stock prices directionally respond to both the analyst's linguistic tone and the manager's voice pitch. In sum, the capital market effects during an earnings conference call are far more nuanced than previously documented.

Individual Analysts’ Non-GAAP Earnings Exclusions and Target Prices

Researchers often do not distinguish non-GAAP exclusions that increase earnings from those that decrease earnings, overlooking the fact that EPS-decreasing exclusions (about one fifth of all analysts’ exclusions) could have different properties and valuation implications. Using both hand-collected analyst reports and large samples from I/B/E/S and Compustat, we document how analysts’ EPS-decreasing exclusions differ from their EPS-increasing exclusions in both the type and timing of the earnings items being excluded, underscoring the need to study the two kinds of exclusions separately. We find that EPS-decreasing exclusions are positively associated with analysts’ optimism incentives in the same way as EPS-increasing exclusions are. This optimism manifests in analysts’ target prices, which are more optimistic (both ex ante and ex post) when analysts make either type of exclusion. Further evidence suggests that when analysts make EPS-decreasing exclusions, they tend to over-estimate firms’ growth prospects, and investors discount the resulting valuation optimism.

Analyst Conflict of Interest and Earnings Conference Call Informativeness

This paper deepens our understanding of the anatomy of an earnings conference call. Prior research indicates that, on average, analysts providing bullish stock recommendations or beatable earnings forecasts benefit from greater access to corporate management. Therefore, we analyze whether and to what extent individual analysts’ ex ante stock recommendations and earnings forecasts affect the information content of analyst-manager conversations. Using intra-day absolute stock price reactions around specific analyst-manager dialogues to measure informativeness, we find that manager dialogues with bearish analysts whose forecasts are missed are more informative. Such analysts engage in longer conversations with more back-and-forth iterations and exhibit a more negative tone, relative to bullish analysts that provide beatable forecasts. Stock prices directionally respond to both the analyst’s linguistic tone and the manager’s voice pitch. In sum, the capital market effects during an earnings conference call are far more nuanced than previously documented.

Toxic Expectations: Analyst Forecasts and Firm Pollution

This research examines the association between analyst forecast bias and firm pollution from a behavioural perspective. Firm pollution may decrease future earnings through regulatory burdens or reduced demand from consumer backlash. I hypothesise that analysts overestimate pollution costs due to overweighting low-probability events, the availability bias, and the base rate fallacy. Using a sample of firms from the Toxic Release Inventory from 1987-2017, I find evidence of systematic pessimism in analyst forecasts of the upcoming annual earnings of polluting firms. I also test whether individual analysts display persistent forecast errors for polluters in accordance with the conservatism bias. Results indicate that pessimistic and optimistic analysts are persistently biased towards polluters, despite having been proven wrong in recent forecasts. Although results depict systematic analyst pessimism for polluters, I find no evidence of any abnormal polluter returns around their earnings announcement dates.

Security analyst firm reputation and investors’ response to forecasted stocks in the biotechnology sector

ABSTRACTStock analyst reputation bridges the gap between technical knowledge of the high-technology and the investor's response to its stock, implying that the reputation of the stand-alone analyst serves this purpose. However, global firms have a stronger influence on their stock analysts than do small firms with 2 personnel. Does firm reputation affect the individual analyst and attract investor attention to forecasted stocks? Evidence from SAFs (security analyst firms) in the biotechnology sector supports this question and proposition. Four moderators (interactive predictors of organisational reputation) show positive correlations. They are the SAF's age, size, performance, and media coverage. These organisational level measures contribute to the institutional theory compared to the literature that focuses on the individual analyst without their organisations. In line with institutional theory, we make three explicit points. First, high uncertainty in the biotechnology sector turns investors to the organisational legitimacy and reputation of the analyst. Second, the organisational age, size, performance and media coverage of the security firm reduces uncertainty of the investor in the biotechnology sector. Third, the reputation of security firm flow to its individual analysts as well as from the individual analyst to the security firm. Thus, the organisational context matters in a social setting.

Consensus Analyst Target Prices: Information Content and Implications for Investors

Consensus analyst target prices are widely available online at no cost to investors. In this paper we consider whether these consensus target prices are informative for predicting future returns. We find that when considered in isolation, consensus target prices are not generally informative about future returns. However, we find that the dispersion of individual analysts’ target prices that comprise the consensus is an important moderating factor. When dispersion is low (high), there is a strong positive (negative) correlation between predicted returns based on the consensus target price and future realized returns. Further analyses suggest that this phenomenon is partially due to consensus target prices being slow to reflect bad news. In addition, we show that the negative correlation between consensus-based predicted returns and future realized returns for high-dispersion stocks exists only for stocks with high short interest or low institutional ownership, suggesting that limits to arbitrage play a role in the observed mispricing and that unsophisticated investors are negatively impacted by high consensus target prices.

Can analysts predict breaks in earnings strings?

PurposeThis study aims to investigate the behavior of sell-side analysts covering firms that are about to experience breaks in strings of consecutive quarterly earnings increases.Design/methodology/approachThe authors estimate the likelihood of analysts predicting a break by using logit regressions for nearly half a million earnings per share forecasts issued by individual analysts from 1992 to 2017.FindingsThe authors find that analysts can predict breaks in earnings strings by issuing less favorable earnings estimates ahead of a break announcement. The probability of detecting a break is higher for longer and more severe breaks, for more skillful analysts and for firms with richer information environments. The authors find that analysts’ warnings are heeded by investors and result in less severe reactions to break announcements.Originality/valueBreaks in strings of earnings increases are situations in which information asymmetry exists and could be mitigated by information intermediaries such as sell-side analysts. Therefore, it is important to examine whether analysts have any informational advantages or disadvantages over insiders and institutional investors in the quarters prior to breaks in strings and whether they communicate such information to the market in a timely and accurate manner, thus reducing information asymmetry by “leveling the field” across the investment community.

Analysts’ Cash Flow Forecast Accuracy and Recommendation Profitability

We examine whether analysts who supplement their earnings forecasts with more accurate cash flow forecasts generate more profitable recommendations. Previous research using consensus cash flow forecasts, or the issuance of cash flow forecasts fails to document a significant relation between analysts’ cash flow forecasts and their stock recommendation performance. We argue that analysts’ cash flow forecasts differ in quality and hypothesize that the relative accuracy of an individual analyst’s cash flow forecasts is positively associated with the profitability of that analyst’s stock recommendations. We find that when analysts issue both earnings and cash flow forecasts for a firm, cash flow forecast accuracy predicts stock recommendation profitability even after controlling for earnings forecast accuracy. Our findings are robust to the use of instrumental variables and the use of recommendation change in the analysis. Whether analysts also issue sales forecasts and/or long-term growth forecasts does not affect the results.

Can New Auditing Standards Improve the Information Environment of the Capital Market? Based on the Accuracy of Analyst Earnings Forecast

Traditional audit reports express audit opinions only by standardized texts, which makes them lack of value. In December 2016, the Ministry of Finance issues 12 new auditing standards, which include Communication of Key Audit Matters in the Independent Audit Reports, aiming to improve the information of audit reports and to reduce the information gap between companies and investors. A+H share listed companies are required to implement the new auditing standards from January 1, 2017. Many scholars study the impact of the new auditing standards on audit report users, such as investors, auditors, etc. (Louis-Philippe, et al., 2014; Christensen, et al., 2014; Wang and Li, 2019). Compared with general report users, analysts as information seekers and interpreters of the capital market (Chen and Liu, 2017), are more professional and sensitive to accounting and auditing information. Due to the high cost of private information acquisition for majority analysts, public information, such as annual reports and audit reports, is the primary source of information. The new auditing standards require auditors to disclose more audit information, especially the disclosure of key audit matters. It improves the information environment of the capital market by increasing the disclosure of the select reason of key audit matters, how to deal with them and the specific audit procedures. Then, can the implementation of the new auditing standards improve the information environment of the capital market by requiring auditors to provide more audit information, which in turn affects the accuracy of analysts’ earnings forecast? Based on the differences in the time and scope of the implementation of the new auditing standards, we use a difference-in-differences model to study the impact of the implementation of the new auditing standards on the accuracy of analysts’ earnings forecast. The study finds that the implementation of the new auditing standards improve the accuracy of analysts’ earnings forecast at the firm level, and the more key audit matters are disclosed in audit reports, the more significant this effect is. Further analysis shows that: (1) The implementation of the new auditing standards mainly reduces analysts’ optimistic bias forecast. (2) The implementation of the new auditing standards improves analysts’ earnings forecast accuracy at the individual level. (3) The implementation effect of the new auditing standards is more significant in companies with low information transparency. The contributions of this paper are as follows: (1) Using the exogenous event of auditing standard reform, this paper confirms that institutional changes can improve the information environment of the capital market, and further improves the accuracy of analysts’ earnings forecast, which enriches the relevant literature on the influencing factors of analysts’ behaviors (Bradshaw, et al., 2010; Wang and Wang, 2012). (2) This paper provides new empirical evidence on the policy effect of the implementation of the new auditing standards (Lu and Zhang, 2018; Wang, et al., 2018; Wang and Li, 2019), and responds to Defond and Zhang (2014) for the awareness of new audit reports and their value. (3) The documents on analysts are lack of study at the individual level, while this paper provides an analysis of heterogeneity at the individual level, which complements the research on individual analysts and their predictive behaviors. (4) This paper gives a positive evaluation of the new auditing standards’ implementation effect, and provides references and suggestions for the follow-up improvement of the auditing standards. This paper verifies the impact of the implementation of the new auditing standards on the information environment of the capital market. It has some implications for policy-makers and analysts. On the one hand, the conclusions of this paper are helpful for policy-makers to evaluate the policy effect of the new auditing standards. On the other hand, there are some implications for analysts. First, improve the ability of analysts themselves, so as to enhance the influence of analysts in the capital market. Second, strengthen the overall construction of the analyst industry, enhance the overall capacity of the industry, and ensure the healthy development of the analyst industry.