No full-text available
To read the full-text of this research,
you can request a copy directly from the authors.
Who’s Heard on the Street? Determinants and Consequences of Financial Analyst Coverage in the Business Press
Abstract
This study examines the determinants of financial analyst coverage in the business press and the effects of such coverage on analysts’ careers. Using a unique database of business press articles that quote a financial analyst, we compare each cited analyst with the other analysts who were actively following the firm and could have been cited by the reporter, but were not. In general, we find that analysts quoted in the business press are more likely to possess characteristics that are positively associated with analyst quality relative to other analysts covering the same firms. This result suggests business press coverage can serve as a useful heuristic to help investors identify high-quality analysts. Moreover, after controlling for analyst quality and in a propensity-score matched sample, we find that analysts with unfavorable recommendations for the firms discussed in the business press are more likely to be cited than analysts with favorable recommendations. We also document significant future career benefits for analysts who receive publicity in the business press, which suggests that the business press is a source of valuable exposure for analysts.
... First, we contribute to the emerging literature that investigates the impact of the business press on capital markets by examining how coverage decisions influence the pricing of analyst information. Research in this area examines the media's familiarity with certain analysts and how this familiarity impacts the market reactions to analyst reports and the career outcomes of the analysts (Bonner et al. 2007;Rees et al. 2015). The focus of these studies is on full articles in the print media that cite or discuss a specific analyst. ...
... We further extend the literature by examining news flashes that are pushed to professional investors immediately after the analyst report is made public; the primary role of such news flashes is to disseminate, rather than create, information. Our analyses shift the timing of the press coverage from an analysis of market reactions influenced by prior press coverage (Bonner et al. 2007;Rees et al. 2015) to those influenced by concurrent press coverage. Finally, we extend this line of research by examining the types of professional investors (i.e., institutional investors and highfrequency traders) that are influenced by the press coverage. ...
... We acknowledge that, while our approach is largely exploratory, our objective here is to explain as much of the variation in the reporter's endogenous decision to cover a particular recommendation as possible, as the model constitutes the first stage in both the Heckman selection model and the propensity-score matched model. First, Rees et al. (2015) find that the press is more likely to quote analysts who have characteristics that research finds to be associated with the quality of the analyst. Accordingly, we control for Institutional Investor All 9 Inferences remain unchanged when we use probit regression, instead of logistic regression. ...
We investigate the information-dissemination role of the business press by examining the coverage of analyst recommendation revisions. Consistent with the press providing wider dissemination of analyst reports, we find evidence that coverage of analyst recommendation revisions significantly increases the initial market reaction to these revisions and decreases the subsequent price drift. Furthermore, we find that news flash coverage, rather than in-depth coverage, of a recommendation revision drives both the initial market reaction results and drift results. Finally, we show that broader press coverage influences the activities of large-trade institutional investors but not high-frequency traders. Overall, our findings suggest a complementary role between analysts and the business press: increased dissemination of recommendation revisions, rather than information creation on the part of the business press, serves to better inform the market about analyst recommendation revision decisions.
... While many prior studies emphasize II's annual All-America Research Team rankings (e.g., Stickel [1992], Leone and Wu [2007], Rees, Sharp, and Twedt [2014a]), the analysts we survey say broker votes are far more important to their career advancement. 2 Specifically, 83% of analysts indicate that broker votes are very important to their career advancement, while only 37% say the same about the II rankings. ...
... Table 9). Although much of the prior literature on analyst rankings emphasizes the II All-America Research Team awards (Stickel [1992], Cox and Kleiman [2000], Leone and Wu [2007], Rees, Sharp, and Twedt [2014a]), analysts indicate that broker or client votes are significantly more important to their career advancement than the II awards. 23 More than 22 Jack Grubman (2013), the highest paid sell-side analyst on Wall Street before being permanently banned from the securities industry for simultaneously advising both firms and investors, recently suggested the analyst industry has changed in form but not in substance. ...
Our objective is to penetrate the “black box” of sell‐side financial analysts by providing new insights into the inputs analysts use and the incentives they face. We survey 365 analysts and conduct 18 follow‐up interviews covering a wide range of topics, including the inputs to analysts’ earnings forecasts and stock recommendations, the value of their industry knowledge, the determinants of their compensation, the career benefits of Institutional Investor All‐Star status, and the factors they consider indicative of high‐quality earnings. One important finding is that private communication with management is a more useful input to analysts’ earnings forecasts and stock recommendations than their own primary research, recent earnings performance, and recent 10‐K and 10‐Q reports. Another notable finding is that issuing earnings forecasts and stock recommendations that are well below the consensus often leads to an increase in analysts’ credibility with their investing clients. We conduct cross‐sectional analyses that highlight the impact of analyst and brokerage characteristics on analysts’ inputs and incentives. Our findings are relevant to investors, managers, analysts, and academic researchers.
... Analysts also benefit from interacting with journalists. Rees et al. (2015) find that analysts quoted in media articles enjoy career benefits in the form of achieving all-star status. Bradshaw et al. (2021) find that analysts' recommendation decisions seem to incorporate information contained in media articles. ...
This paper examines how the media responds to the loss of analyst coverage resulting from brokerage mergers and closures. We find some evidence of an overall decrease in media coverage of affected firms, consistent with analysts serving as a useful information source for the media. However, media coverage during the earnings announcement significantly increases, consistent with the media switching their efforts to events with more non-analyst (e.g., firm-provided) information available. Both the overall decrease and the shift towards the earnings announcement are more pronounced for journalists who are more likely to rely on analysts and for firms that provide more information to supplement their earnings announcement (e.g., bundled guidance and investor relations). Overall our paper suggests that the loss of analyst coverage increases the costs of supplying media coverage, resulting in a decrease in media coverage as well as a greater focus on the earnings announcement within the remaining coverage.
... This problem is also actual for the trade press, whose audience is more demanding. Trade press potentially can help its advertisers to spread certain information to decision makers without any obstacles (Rees et al., 2015). In this context, the present study aims to ascertain a socio-demographic portrait of trade media audience. ...
Modern publishing businesses need a complex roadmap for developing print and digital directions, and lack of the strategy for media means overload with unnecessary current activities for employees, lack of attention to readers and advertisers and dissatisfaction with the financial achievements by head office. The proposed paper attempts to understand the usage patterns and preferences of audience for print trade magazine. The questionnaire is based on the theory of the functions of the trade press to make sure that the magazine performs the established functions for its audience. The data also helped establish the demographics of the magazine's audience. The findings of the study enable to throw light on the present media usage habits and to examine the trade media consumption behavior. The study showed that the audience of the trade media is very homogeneous and characterized by similar socio-economic characteristics. Even though the study gives insights into current trade press preferences of audience, the results may not be generalized as every audience has own territorial, gender and financial differences and diversified socio-economic background. The study can be further extended by taking a sample from different types of trade media.
... Nevertheless, in further models of analyst appraisals we controlled for the amount of time spent describing the PSDM program, and the results were unchanged. We included two controls that are believed to indicate an analyst's status or influence in the investment community: selection as an "All-America" analyst by Institutional Investor magazine, and the size of the analyst's employer, measured as the number of analysts employed at the individual's firm (Rees, Sharp, and Twedt 2015). We also controlled for an analyst's most recent earnings forecast and stock recommendation for a focal firm in estimating forecasts and upgrades/downgrades, respectively. ...
We examine the symbolic management of participative strategic decision making (“PSDM”) programs that purportedly use crowdsourcing technology to solicit strategic input below the executive suite, but are often decoupled from actual strategic decision making. Specifically, top management may decide on a strategic option before soliciting input under the program. The first portion of our theoretical framework explains why disclosure of a PSDM program in communicating with security analysts is associated with more positive analyst appraisals, despite decoupling, and why the benefits of disclosure are amplified to the extent that leaders highlight the use of crowdsourcing technology in the program. The second portion of our framework addresses the antecedents of symbolic adoption. We suggest that firms are more likely to adopt and decouple a program when the CEO has a personal friendship tie to the CEO of another firm that has adopted and decoupled, especially following relatively negative analyst appraisals. Analysis of a unique dataset that includes longitudinal survey data from executives supported our predictions.
... Frijns and Huynh (2018) argue that analysts do not follow each other but their actions simply reflect access to the same information, which reduces the asymmetry gap between analysts, resulting in similar recommendations (Bushee et al., 2010;Tetlock, 2010). On the other hand, incentive theory suggests that media coverage might have a negative effect on herding as analysts will try to show their individualism by issuing decisions away from the consensus to improve their career prospects (Rees et al., 2014). Lugo et al. (2015) suggest the first two theories are the most relevant in explaining herding behaviour amongst CRAs. ...
... Although the focus of our study is on the media's effect on analyst forecasts, it is also possible for financial analysts to contribute content to the media (Bonner et al., 2007;Rees et al., 2015). However, in this study we investigate how analysts learn from the media because this question is more central to the accounting literature and because we are specifically interested in countrylevel media characteristics. ...
We examine the effect of media competition on analyst forecast properties in an international setting using 113,436 firm-year observations from 32 countries spanning 2000 through 2012. We find that firms in countries with stronger media competition enjoy more accurate, less optimistically biased, and less dispersed analyst forecasts. The effects of media competition on the properties of analyst forecasts are stronger for firms with lower institutional ownership, for firms followed by fewer analysts or by analysts from smaller brokerage houses, and for firms with weaker financial performance. This suggests that media competition plays a more pronounced role in shaping the information environment when information from nonmedia channels is likely to be limited or of lower quality. Finally, we find that analysts in countries with stronger media competition tend to follow more firms, suggesting that stronger media competition reduces analysts’ information acquisition costs, which in turn, improves the properties of their forecasts.
... Media attention may also reflect financial analyst coverage. While journalists are more likely to cite highquality analysts in the business press (Rees, Sharp, & Twedt, 2015), Fang and Peress (2009) found that firms covered by analysts were less likely to be in the media, suggesting that analyst and media coverage are substitutes rather than complements. Bushee, Core, Guay, and Hamm (2010) noted effects of media coverage of firm distinct from analyst coverage. ...
en We examine the influence of target‐CEO celebrity on the premium paid by bidders using information asymmetry, uncertainty, and resource‐based‐view perspectives. Studies suggest that CEOs and their firms can suffer from a “burden of celebrity” if they fail to meet heightened performance expectations. We hypothesize that bidders acquire targets led by celebrity CEOs (those who garner significant and widespread media attention) with lower premiums because bidders react to market overvaluation. We also argue that celebrity CEOs who leave post‐merger drive premiums even lower because they take their potential integration value with them. A six‐year sample of US‐based M&A transactions supports our hypotheses.
Résumé
fr Nous examinons l'influence de la célébrité du PDG d'une entreprise achetée sur la prime payée par l'acquéreur. Nous utilisons des perspectives d'asymétrie d'information, d'incertitude et de ressources. Les études existantes proposent que le PDG et son entreprise puissent souffrir d'un « fardeau de célébrité » s'ils ne répondent pas aux attentes élevées de performance. Nous proposons que les acquéreurs d'entreprises offrent des primes moins élevées aux entreprises dirigées par des PDG célèbres (ceux qui attirent une attention marquante et répandue par des médias) parce qu'ils réagissent à une possible surévaluation du marché. Nous soutenons également que lorsque les PDG célèbres quittent la firme après l'acquisition, les primes diminuent encore, car leurs contributions potentielles à l'intégration partent avec eux. Un échantillon sur six ans d'opérations de fusion et d'acquisition basées aux États‐Unis appuie nos hypothèses.
... The general consensus of the majority of studies in this area suggests that analysts' media popularity is more atttributable to the accuracy of their forecasts than to their sentiments. Recent studies by Rees et al., (2012) reveal that among the major factors that determine the media coverage of analysts' is the quality of their forecasts, which may be because of the simple fact that reporters are more interested in information from those analysts who will enhance the intergrity of their stories. ...
This study examines contributing factors to the differential forecasting abilities of sell-side analysts and the relation between the sentiments of these analysts and their media exposure. In particular, I investigate whether the level of optimism expressed in sell-side analysts’ reports of fifteen constituents of primarily the S&P 500 Oil and Gas Industry1, enhance the media appearance of these analysts. Using a number of variables estimated from the I/B/E/S Detail history database, 15,455 analyst reports collected from Thompson Reuters Investext and analyst media appearances obtained from Dow Jones Factiva from 1999 to 2014, I run a multiple linear regression to determine the effect of independent variables on dependent variables. I find that an analyst’s forecast accuracy (as measured by the errors inherent in his forecasts) is negatively associated with the analyst’s level of media exposure, experience, brokerage size, the number of times he revises his forecasts in a year and the number of companies followed by the analyst, and positively associated with the analyst’s level of optimism expressed in his reports, forecast horizon and the size of the company he follows.
This study examines whether and how media coverage improves price discovery before earnings announcements. Given the broad reach and timeliness of media coverage, understanding its role in forming earnings expectations is important. I posit that the media specialize in searching for and screening news, while institutional investors and financial analysts specialize in interpreting and integrating information. I expect these coordinated efforts to improve earnings expectations and preempt upcoming earnings announcements. Consistent with this prediction, I find (i) preannouncement media coverage is negatively associated with price revaluations during earnings announcements, (ii) preannouncement media coverage is positively associated with institutional investors’ information acquisition and financial analysts’ forecast frequency, and (iii) institutional information acquisition and analyst forecast activity are two mechanisms by which media coverage preempts upcoming earnings. My main results are robust to short‐window tests and identification concerns. Overall, my findings suggest that media coverage coordinates information efforts and accelerates the incorporation of information in prices, facilitating preannouncement price discovery. This article is protected by copyright. All rights reserved.
Using 102 sovereigns rated by the three largest credit rating agencies (CRA), S&P, Moody's and Fitch between January 2000 and January 2019, we document that the first‐mover CRA (S&P) in downgrades falls into a commercial trap. Namely, each sovereign downgrade by one notch by the first‐mover CRA (S&P) results in 2.4% increase in the probability of a rating contract being cancelled by the sovereign client. The more downgrades S&P makes in a given month, the more their sovereign rating coverage falls relative to its rivals. Our results are more pronounced for downgrades on small sovereign borrowers than on large sovereign borrowers. This paper explores the interaction between three themes of the literature: herding behaviour amongst CRAs, issues of conflict of interest and ratings quality. Our empirical evidence gives credence to, and underscores the need for sovereign ratings to be made in an impartial way and independent of their commercial ramifications elsewhere in the CRA.
Financial analysts (‘sell side’) face incentives that result in biased information for investors (‘buy side’). We examine whether a feedback channel from investors to financial analysts (comparable to the broker vote system) reduces these biases and thereby enhances information efficiency. In a controlled experiment with a monetary payment structure, 344 graduate students assume roles as analysts or investors, with the analysts making earnings recommendations for the investors in the presence of biased incentives. Under the treatment condition, the investors provide feedback to the analysts. Consistent with the monetary incentives built into the broker vote system and psychological theories, the presence of this feedback: (i) reduces bias among analysts; and (ii) enhances investors’ critical evaluation of information. Given the informational benefits of investor feedback, we highlight an unintended consequence of the European Union’s decision to abolish indirect payments to analysts from 2018 onwards.
Both sell-side analysts and the media are information intermediaries in capital markets. This study investigates the association between sell-side analyst research and information in firm-specific news coverage. More frequent recent news coverage is associated with stronger market reactions to analysts' research revisions, and primarily explained by soft information in news coverage. The primary result is robust to using both an instrumental variable and a quasi-natural experimental setting to generate exogenous variation in media coverage, alleviating concerns about endogeneity. In addition, using textual analysis, we document that explicit media references in analyst research reports are significantly associated with more frequent analyst revisions and stronger market reactions to revisions. Our study provides empirical evidence of analysts' assimilation of information from the financial press and their role in the efficiency of capital markets.
JEL Classifications: G12; G14; G24.
We investigate the relation between underlying risk preferences on analysts’ work‐related decisions. Specifically, we examine whether facial width‐to‐height ratio (fWHR), an innate personal characteristic that has been linked to financial risk tolerance, is associated with analysts’ stock coverage decisions and the boldness of their earnings forecasts and stock recommendations. We find that high‐fWHR analysts cover firms with lower earnings predictability, and issue bolder forecasts and recommendations. Our findings shed new light on the black box of analyst decision making, assisting investment practitioners in evaluating the information content produced by different types of analysts and understanding the observed dispersion in analyst forecasts. This article is protected by copyright. All rights reserved
Well-functioning capital markets rely on a complex set of institutions and participants that ensure capital is allocated to its best possible use, and that information flows between firms receiving capital and the investors who provide it. In this manuscript, we endeavor to understand whether, how, and under what circumstances sell-side research contributes to the functioning of capital markets.We review major findings in the literature, address significant regulatory and technological changes, and offer suggestions for future research.
We examine whether financial analysts strategically time the announcement of their recommendation revisions consistent with their incentives to maintain relations with management. We provide evidence that investor and media attention to recommendation revisions is reduced on weekends, which analysts can exploit to strategically time the release of their revisions. We find that downgrades are a higher proportion of weekend revisions than weekday revisions and that analysts with characteristics that suggest they possess the strongest incentives to maintain favor with management are more likely to downgrade on the weekend. In contrast, analysts absent these characteristics are more likely to release downgrades during the week, consistent with these analysts being driven primarily by other incentives, such as the timely release of their recommendation and garnering media attention. We also present evidence suggesting that strategic disclosure of recommendation downgrades is associated with greater access to management on public earnings conference calls.
We use daily page views of analyst estimates, ratings, and target prices on Yahoo Finance to understand when users seek sell-side analyst research. Demand for this information is most pronounced on days with earnings announcements, management guidance, and All-Star analyst reports. Surprisingly, demand does not increase at Form 10-K and Form 10-Q filings. While the overall demand for analyst estimates is 19.9 percent less than for analyst ratings and target prices, on earnings announcement and management guidance days, this preference is reversed. Moreover, the demand for analyst information substantially trumps that of SEC filings and financial statement information.
JEL Classifications: M41; G14; G24.
We survey 344 buy-side analysts from 181 investment firms and conduct 16 detailed follow-up interviews to gain insights into the activities of buy-side analysts, including the determinants of their compensation, the inputs to their stock recommendations, their beliefs about financial reporting quality, and the role of sell-side analysts in buy-side research. One important finding is that 10-K or 10-Q reports are more useful than quarterly conference calls and management earnings guidance for determining buy-side analysts’ stock recommendations. Our results also suggest that sell-side analysts add value by providing buy-side analysts with in-depth industry knowledge and access to company management.
This study investigates the impact of dissemination on the efficiency of the price discovery process with respect to management earnings guidance disclosures. I first identify firm and guidance characteristics associated with the likelihood that guidance receives coverage in the Dow Jones Newswires. Using propensity score, within-firm, and returns-based matched control samples of guidance, I find that newswire dissemination is associated with larger initial price reactions and, more importantly, an increase in the speed with which guidance information is incorporated into price. I also find that newswire coverage affects the market's reaction to stand-alone versus bundled guidance and good versus bad news guidance. This study is the first to provide evidence of systematic variation, both across and within firms, in the breadth of guidance dissemination, and it shows that this variation has a substantial effect on how investors respond to guidance.
JEL Classifications: G14; M41; L82.
Most of the research in comparative corporate governance has, implicitly or explicitly, taken the US as benchmark. But recent corporate scandals, such as Enron and Worldcom, question this alleged supremacy. What went wrong? In this chapter we claim that the problem is not just lack of appropriate disclosure or legislation, but a more fundamental one: deficient incentives for the media to expose poor governance practices. We argue that corporate reporters have strong incentives to enter into a quid pro quo relationship with their sources, where they receive private information in exchange for a positive spin on companies' news. Since the value of this relationship is higher during booms, so, too, will the pro-company bias. We find evidence in support of this hypothesis by looking at Harvard Business School case studies.
This article aims to reestablish the long-standing conjecture that conformity is high at the middle and low at either end of a status order. On a theoretical level, the article clarifies the basis for expecting such an inverted U-shaped curve, taking care to specify key scope conditions on the social-psychological orientations of the actors, the characteristics of the status structure, and the nature of the relevant actions. It also validates the conjecture in two settings that both meet such conditions and allow for the elimination of confounding effects: the Silicon Valley legal services market and the market for investment advice. These results inform our understanding of how an actor's status interacts with her role incumbency to produce differential conformity in settings that meet the specified scope conditions.
The propensity score is the conditional probability of assignment to a particular treatment given a vector of observed covariates. Both large and small sample theory show that adjustment for the scalar propensity score is sufficient to remove bias due to all observed covariates. Applications include: (i) matched sampling on the univariate propensity score, which is a generalization of discriminant matching, (ii) multivariate adjustment by subclassification on the propensity score where the same subclasses are used to estimate treatment effects for all outcome variables and in all subpopulations, and (iii) visual representation of multivariate covariance adjustment by a two- dimensional plot.
Using a comprehensive database of headlines about individual companies, I examine monthly returns following public news. I compare them to stocks with similar returns, but no identifiable public news. There is a difference between the two sets. I find strong drift after bad news. Investors seem to react slowly to this information. I also find reversal after extreme price movements unaccompanied by public news. The separate patterns appear even after adjustments for risk exposure and other effects. They are, however, mainly seen in smaller, more illiquid stocks. These findings support some integrated theories of investor over- and underreaction.
We study the effect of the Global Analyst Research Settlement and related regulations on sell-side research. These regulations
attempted to mitigate the interdependence between research and investment banking. We document that following the regulations
many brokerage houses have migrated from the traditional five-tier rating system to a three-tier system. Optimistic recommendations
have become less frequent and more informative, whereas neutral and pessimistic recommendations have become more frequent
and less informative. Importantly, the overall informativeness of recommendations has declined. The likelihood of issuing
optimistic recommendations no longer depends on affiliation with the covered firm, although affiliated analysts are still
reluctant to issue pessimistic recommendations.
Operating performance and stock return results imply that managers who commit fraud anticipate large stock price declines
if they were to report truthfully, which would cause greater losses for managerial stockholdings than for options because
of differences in convexity. Fraud firms have significantly greater incentives from unrestricted stockholdings than control
firms do, and unrestricted stockholdings are their largest incentive source. Our results emphasize the importance of the shape
and vesting status of incentive payoffs in providing incentives to commit fraud. Fraud firms also have characteristics that
suggest a lower likelihood of fraud detection, which implies lower expected costs of fraud.
It is taken for granted in the knowledge economy that companies must employ the most talented performers to compete and succeed. Many firms try to buy stars by luring them away from competitors. But Boris Groysberg shows what an uncertain and disastrous practice this can be.After examining the careers of more than a thousand star analysts at Wall Street investment banks, and conducting more than two hundred frank interviews, Groysberg comes to a striking conclusion: star analysts who change firms suffer an immediate and lasting decline in performance. Their earlier excellence appears to have depended heavily on their former firms' general and proprietary resources, organizational cultures, networks, and colleagues. There are a few exceptions, such as stars who move with their teams and stars who switch to better firms. Female stars also perform better after changing jobs than their male counterparts do. But most stars who switch firms turn out to be meteors, quickly losing luster in their new settings.Groysberg also explores how some Wall Street research departments are successfully growing, retaining, and deploying their own stars. Finally, the book examines how its findings apply to many other occupations, from general managers to football players.Chasing Starsoffers profound insights into the fundamental nature of outstanding performance. It also offers practical guidance to individuals on how to manage their careers strategically, and to companies on how to identify, develop, and keep talent.
This paper investigates the press's role as a monitor or "watchdog" for accounting fraud. I find that the press fulfills this role by rebroadcasting information from other information intermediaries (analysts, auditors, and lawsuits) and by undertaking original investigation and analysis. Articles based on original analysis provide new information to the markets while those that rebroadcast allegations from other intermediaries do not. Consistent with a dual role for the press, I find that business-oriented press is more likely to undertake original analysis while nonbusiness periodicals focus primarily on rebroadcasting. I also investigate the determinates of press coverage, finding systematic biases in the types of firms and frauds for which articles are published. In general, the press covers firms and frauds that will be of interest to a broad set of readers and situations that are lower cost to identify and investigate.
This article tests whether stock market investors appropriately distinguish between new and old information about firms. I define the staleness of a news story as its textual similarity to the previous ten stories about the same firm. I find that firms' stock returns respond less to stale news. Even so, a firm's return on the day of stale news negatively predicts its return in the following week. Individual investors trade more aggressively on news when news is stale. The subsequent return reversal is significantly larger in stocks with above-average individual investor trading activity. These results are consistent with the idea that individual investors overreact to stale information, leading to temporary movements in firms' stock prices.
We document systematic evidence of risk effects of disclosures culled from a virtually exhaustive set of sources from the print medium. We content analyze more than 100,000 disclosure reports by management, analysts, and news reporters (i.e., business press) in constructing firm-specific disclosure measures that are quantitative and amenable to replication. We expect credibility and timeliness differences in the disclosures by source, which would translate into differential cost of capital effects. We find that when content analysis indicates favorable disclosures, the firm's risk, as proxied by the cost of capital, stock return volatility, and analyst forecast dispersion, declines significantly. In contrast, unfavorable disclosures are accompanied by significant increases in risk measures. Analysis of disclosures by source-corporations, analysts, and the business press-reveals that negative disclosures from business press sources result in increased cost of capital and return volatility, and favorable reports from business press reduce the cost of capital and return volatility.
We examine how the disclosure of negative firm information may prompt top executives to render personal and professional favors for security analysts, who may reciprocate by rating firms relatively positively. We further examine how negative ratings may prompt executive negative reciprocity toward an analyst and how such retaliation may deter other analysts' negative ratings. Because analyst recommendations influence investor behavior, firm reputation, and access to capital, our theory and supportive findings suggest that corporate leaders enhance and perpetuate external support for their firms via social influence processes that develop and maintain social exchange relations with a key type of external constituent.
This paper identifies investors' asymmetric attention to good and bad news as a potential explanation for the neglected firm premium in the cross-section of stock returns. Utilizing ex ante predicted probability of media coverage (PMC) with respect to earnings news as a measure of investor attention, I show that a portfolio strategy based on long positions in low-attention stocks yields excess returns of approximately 70 bps per month between 1984 and 2005. The finding of high risk-adjusted returns for these "neglected" stocks (typically small firms with low analyst coverage, low institutional ownership, and little trading activity) appears to be highly consistent with, e.g., Merton's (1987) investor recognition hypothesis, or an information risk setting (Easley et al. (2002)). However, in examining the event-specific determinants of media coverage, I find evidence of a significant "negativity bias" in attention: holding other factors constant, bad news is more likely to attract coverage than is good news regarding an otherwise-identical firm (i.e., "if it bleeds, it leads"). Given recent evidence in the literature regarding stock-price underreaction to low-attention events, this suggests that findings of significant premia for "neglected" stocks may be explained, at least in part, by an asymmetric underreaction to positive news events from these firms. Consistent with this hypothesis, I find that the excess returns to low-PMC portfolios are attributable to drift in the stock prices of low-attention "good news" firms, while low-attention "bad news" firms appear to be efficiently priced.
This paper examines the television networks' coverage of the unemployment rate, the inflation rate as measured by the Consumer
Price Index, and the growth rate of real GNP over the twelve years from 1973 through 1984. This time period includes two major
recessions, two severe bursts of inflation, and three presidential elections. A common complaint is that the networks overemphasize
bad economic news. Using two measures of coverage, this paper examines whether the television networks give greater coverage
to these statistics when they are deteriorating. The empirical results reveal that the networks do give greater coverage to
bad economic news during nonelection years, but this pattern disappears during election years. The empirical results also
reveal that presidential comments are very powerful in shaping the amount of coverage given to these economic statistics.
Prior research suggests that investors' response to analyst forecast revisions increases with the analyst's forecast accuracy. We extend this research by examining whether investors appear to extract all of the information that analyst characteristics provide about forecast accuracy. We find that only some of the analyst characteristics that are associated with future forecast accuracy are also associated with return responses to forecast revisions. This suggests that investors fail to extract some of the information that analyst characteristics can provide about future forecast accuracy. In addition, forecast properties other than expected accuracy appear to be value-relevant. For example, investors respond more strongly to forecasts released earlier in the year and to forecasts by analysts employed by large brokerages than appears warranted by the ability of forecast timeliness and broker size to predict forecast accuracy. We conclude that investors respond to analysts' forecast revisions as if forecast accuracy is not all that matters.
We examine whether analysts who participate in earnings conference calls by asking questions receive private information benefits relative to analysts who do not ask questions. Private information benefits accrue to a participating analyst when a manager's response to the analyst's question uniquely complements that analyst's private information set. Prior evidence is mixed on the existence and nature of private benefits, especially in the post-Reg FD period. Our evidence is consistent with participating analysts receiving beneficial private information. Specifically, we find that initial annual earnings forecasts subsequent to a conference call are more accurate and more timely for participating analysts. We also find that participating analysts are more likely to reciprocate by upgrading (not downgrading) a firm's stock recommendation upon receiving good (bad) earnings news. Our results suggest that managers and analysts continue to exchange private benefits in the Post Regulation FD era.
This paper reviews research regarding the role of financial analysts in capital markets. The paper builds on the perspectives provided by Schipper (1991) and Brown (1993). We categorize papers published mainly since 1992 and selectively discuss aspects of these papers that address or suggest key research topics of ongoing interest in seven broad areas: analysts' decision processes, the determinants of analyst expertise and distributions of individual analysts' forecasts, the informativeness of analysts' research outputs, analyst and market efficiency with respect to information, effects of analysts' economic incentives on their research outputs, effects of the institutional and regulatory environment (including cross-country comparisons), and the limitations of databases and various research paradigms.
This paper examines cross-sectional differences in the optimistic behavior of financial analysts. Specifically, we investigate whether the predictive accuracy of past information (e.g., time-series of earnings, past returns, etc.) is associated with the magnitude of the bias in analysts' earnings forecasts. We posit that there is higher demand for non-public information for firms whose earnings are difficult to accurately predict than for firms whose earnings can be accurately forecasted using public information. Assuming that optimism facilitates access to management's non-public information, we hypothesize that analysts will issue more optimistic forecasts for low predictability firms than for high predictability firms. Our results support this hypothesis.
We examine the extent to which analysts who participate in earnings conference calls by asking questions possess superior private information relative to analysts who do not ask questions. Using a large sample of earnings conference call transcripts over the period 2002 to 2005, we find that annual earnings forecasts issued immediately subsequent to a conference call are both more accurate and timelier for participating analysts relative to nonparticipating analysts. These results hold after controlling for observable analyst characteristics, suggesting conference call participation can serve as a mechanism to identify analysts possessing superior private information. The economic magnitude of the superior private information contained in participating analyst forecasts is small but comparable with magnitudes reported in prior studies with respect to other analyst characteristics. Our mediation analysis does not support the notion that the superior private information stems exclusively from the information received during the call. Therefore, from a regulatory stand point, our results suggest that regulatory intervention to allow for equal participation during conference calls may be unwarranted.
In this paper we present results from an event study based on a unique data set of corporate news in the media. The data is provided by Media Tenor, a research institute which collects and rates all corporate news from the most important German daily newspapers and TV news. Our analysis is based on roughly 300,000 corporate news on 125 large- and medium-sized companies in 5 large daily newspapers and 7 TV news shows from Germany between July 1998 and October 2006. Since analysts rate the news, we have an exogenous measure whether news are good or bad news for a company. Based on this data we can show that the incorporation of information in prices is fairly fast. The main price reaction occurs on the day of the arrival of the new information. This price jump is especially large if the news coverage in the media is accompanied by ad hoc announcements made by the corporation itself. While there is only a very short-term post-event drift after good news, prices tend to drift for several days after bad news. The post-event trading volume is significantly higher than before the news for several days for good as well as bad news. To provide a test of the model of Hong and Stein (1999) we define several proxies for the speed of the information diffusion through different investor groups. We find that for smaller companies with lower abnormal media coverage the information diffusion is indeed slower, as predicted by theory. We further combine the media coverage data with individual investors transaction data in stocks and bank-issued warrants from a large German online broker. Our results indicate that individual investors, especially stock investors, as compared to warrant investors, react slower to new information as the market does. A tendency to react to bad news by buying put warrants, because selling stocks short was impossible for private investors during our sample period, could not be observed.
This paper investigates whether media coverage affects firm value and CEO ability to extract rents. Between 1992 and 2002, Fortune 500 firms with high levels of CEO media coverage and positive coverage exhibit higher Tobin’s q. The result is robust to alternative econometric methods and checks of causality. Firms with the highest level of CEO media coverage and positive coverage outperform those with the lowest levels by 8 and 7 percent per year, respectively. Subsequent total pay rise is 4.1 percent above and beyond what CEOs obtain from the increase in firm value that arises due to media coverage.
We examine changes in analysts’ monitoring incentives and effectiveness as they progress along their career paths. We find that analysts are less likely to be elected all-stars in the annual Institutional Investor elections when the firms they covered in the year prior to the election have high absolute abnormal accruals. Consistent with the hypothesis that career concerns play an important role in their coverage decisions, up and coming analysts strategically choose firms to cover. Specifically, they drop firms with high earnings management and replace them with low earnings management firms. Once they are elected all-stars and become established in their careers, they replace low earnings management firms with high earnings management firms. Firms that gain all-star coverage reduce earnings management. In addition, investors value recommendation downgrades by all-stars significantly more than downgrades by incipient stars or ex-stars, suggesting that that analyst visibility/influence, rather than analyst innate ability, is the underlying source of the effective monitoring of star analysts.
Using 1994–2009 data, we find that All-American (AA) analysts’ buy and sell portfolio alphas significantly exceed those of non-AAs by up to 7% per annum after risk-adjustments for investors with advance access to analyst recommendations. For investors without such access, top-rank AAs still earn significantly higher (by 4%) annual alphas in buy recommendations than others. AAs’ superior performance exists before (as well as after) they are elected, is not explained by market overreactions to stars, and is not significantly eroded after Reg-FD. Election to top-AA ranks predicts future performance in buy recommendations above and beyond other previously observable analyst characteristics. Institutional investors actively evaluate analysts and update the AA roster accordingly. Collectively, these results suggest that skill differences among analysts exist and AA election reflects institutional investors’ ability to evaluate and benefit from elected analysts’ superior skills. Other investors’ opportunity to profit from the stars’ opinions exists, but is limited due to their timing disadvantage.
We use proprietary data from a major investment bank to investigate factors associated with analysts’ annual compensation. We find compensation to be positively related to "All-Star" recognition, investment-banking contributions, the size of analysts’ portfolios, and whether an analyst is identified as a top stock-picker by the Wall Street Journal. We find no evidence that compensation is related to earnings forecast accuracy. But consistent with prior studies, we find analyst turnover to be related to forecast accuracy, suggesting that analyst forecasting incentives are primarily termination-based. Additional analyses indicate that "All-Star" recognition proxies for buy-side client votes on analyst research quality used to allocate commissions across banks and analysts. Taken as a whole, our evidence is consistent with analyst compensation being designed to reward actions that increase brokerage and investment-banking revenues. To assess the generality of our findings, we test the same relations using compensation data from a second high-status bank and obtain similar results.
This paper presents evidence for international markets about the characteristics of financial analysts who are able to provide more accurate earnings forecasts than their peers. The evidence is provided for ten individual countries and for country groups formed on the basis of a similar culture and corporate governance. While prior studies document that forecast accuracy in the U.S. is associated with several analyst characteristics, this topic has not been investigated in an international setting. We predict that differences in culture and corporate governance will cause the influence of some of the characteristics to differ by country. We find that relative forecast accuracy is influenced by years of experience, size of the analyst's employer, and frequency of forecast issuance in many of the countries and show that the significance of experience and employer is conditional on the type of culture and corporate governance of the country.
We study the attributes of superstar financial analysts ranked in the Institutional Investor magazine annual surveys from 1991 to 2000. In addition to documenting a strong positive relation between the rankings and analyst performance, we also investigate whether the performance by ranked analysts is due to luck or superior ability. Our results indicate that ranked analysts' performance is likely due to their superior ability because there is performance persistence and the ranked analysts are recognized as leaders by other analysts even before they first become ranked by Institutional Investor. We next test whether the superior ability of ranked analysts stems from their greater experience or innate talent. Our findings point to an "innate talent" rather than an "experience" explanation for the ranked analysts. Collectively, the evidence supports the notion that the Institutional Investor rankings serve the meaningful role of identifying high quality analysts in the labor market and is inconsistent with the allegation that the rankings are 'popularity contests' with little substance.
Disentangling the causal impact of media reporting from the impact of the events being reported is challenging. We solve this problem by comparing the behaviors of investors with access to different media coverage of the same information event. We use zip codes to identify 19 mutually exclusive trading regions corresponding with large U.S. cities. For all earnings announcements of S&P 500 Index firms, we find that local media coverage strongly predicts local trading, after controlling for earnings, investor, and newspaper characteristics. Moreover, local trading is strongly related to the timing of local reporting, a particular challenge to nonmedia explanations.
There is a growing body of work suggesting that responses to positive and negative information are asymmetric—that negative information has a much greater impact on individuals’ attitudes than does positive information. This paper explores these asymmetries in mass media responsiveness to positive and negative economic shifts and in public responsiveness to both the economy itself and economic news coverage. Using time-series analyses of U.K. media and public opinion, strong evidence is found of asymmetry. The dynamic is discussed as it applies to political communications and policymaking and more generally to public responsiveness in representative democracies.
This article tests whether stock market investors appropriately distinguish between new and old information about firms. I define the staleness of a news story as its textual similarity to the previous ten stories about the same firm. I find that firms' stock returns respond less to stale news. Even so, a firm's return on the day of stale news negatively predicts its return in the following week. Individual investors trade more aggressively on news when news is stale. The subsequent return reversal is significantly larger in stocks with above-average individual investor trading activity. These results are consistent with the idea that individual investors overreact to stale information, leading to temporary movements in firms' stock prices. The Author 2011. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.
The existing literature measures the contribution of analyst recommendation changes using average stock-price reactions. With such an approach, recommendation changes can have a significant impact even if no recommendation has a visible stock-price impact. Instead, we call a recommendation change influential only if it affects the stock price of the affected firm visibly. We show that only 12% of recommendation changes are influential. Recommendation changes are more likely to be influential if they are from leader, star, previously influential analysts, issued away from consensus, accompanied by earnings forecasts, and issued on growth, small, high institutional ownership, or high forecast dispersion firms. The Author 2011. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org., Oxford University Press.
By reaching a broad population of investors, mass media can alleviate informational frictions and affect security pricing even if it does not supply genuine news. We investigate this hypothesis by studying the cross-sectional relation between media coverage and expected stock returns. We find that stocks with no media coverage earn higher returns than stocks with high media coverage even after controlling for well-known risk factors. These results are more pronounced among small stocks and stocks with high individual ownership, low analyst following, and high idiosyncratic volatility. Our findings suggest that the breadth of information dissemination affects stock returns. Copyright (c) 2009 the American Finance Association.
Bradshaw et al. (J Acc Res 39:45–74, 2001) find that analyst forecast over-optimism is greater for firms with high accruals. This “accrual-related over-optimism” is
generally interpreted as evidence that analyst forecasts do not fully incorporate predictable earnings reversals associated
with high accruals. We investigate whether analyst experience, access to resources (brokerage size), and portfolio complexity
moderate the relation between over-optimistic forecasts and high accruals. We demonstrate the robustness of accrual-related
over-optimism to controls for cash flow and prior forecast errors. We find that accrual-related over-optimism is lower for
analysts with greater general experience and for analysts following fewer firms but find only limited evidence of lower accrual-related
over-optimism for analysts from larger brokerages and for analysts following fewer industries.
KeywordsAnalyst forecasts–Analyst experience–Brokerage size–Analyst optimism–Working capital accruals
We examine whether analysts’ earnings forecasts are more accurate when they also issue cash flow forecasts. We find that (i)
analysts’ earnings forecasts issued together with cash flow forecasts are more accurate than those not accompanied by cash
flow forecasts, and (ii) analysts’ earnings forecasts reflect a better understanding of the implications of current earnings
for future earnings when they are accompanied by cash flow forecasts. These results are consistent with analysts adopting
a more structured and disciplined approach to forecasting earnings when they also issue cash flow forecasts. Finally, we find
that more accurate cash flow forecasts decrease the likelihood of analysts being fired, suggesting that cash flow forecast
accuracy is relevant to analysts’ career outcomes.
The propensity score is the conditional probability of assignment to a particular treatment given a vector of observed covariates. Both large and small sample theory show that adjustment for the scalar propensity score is sufficient to remove bias due to all observed covariates. Applications include: (i) matched sampling on the univariate propensity score, which is a generalization of discriminant matching, (ii) multivariate adjustment by subclassification on the propensity score where the same subclasses are used to estimate treatment effects for all outcome variables and in all subpopulations, and (iii) visual representation of multivariate covariance adjustment by a two-dimensional plot.
Several published studies claim that acquisition targets can be accurately predicted by models using public data. This paper points out a number of methodological flaws which bias the results of these studies. A fresh empirical study is carried out after correcting these methodological flaws. The results show that it is difficult to predict targets, indicating that the prediction accuracies reported by the earlier studies are overstated. The methodological issues addressed in this paper are also relevant to other research settings that involve binary state prediction models with skewed distribution of the two states of interest.
In this study of sell-side analysts’ forecasts, we explore the effects of analyst aptitude, learning-by-doing, and the internal environment of the brokerage house on forecast accuracy. Our results indicate that analysts’ aptitude and brokerage house characteristics are associated with forecast accuracy, while learning-by-doing is only associated with forecast accuracy when we do not control for analysts’ company-specific aptitude in forecasting. It is unlikely that this result is caused by measurement errors because it is robust when we use a sub-sample where we can accurately measure experience.
The corporate information environment develops endogenously as a consequence of information asymmetries and agency problems between investors, entrepreneurs, and managers. We review current research on the three main decisions that shape the corporate information environment in capital market settings: (1) managers’ voluntary disclosure decisions, (2) disclosures mandated by regulators, and (3) reporting decisions by analysts. We conclude that, in the last ten years, research has generated several useful insights. Despite this progress, we call for researchers to consider interdependencies between the various decisions that shape the corporate information environment and suggest new and interesting issues for researchers to address.
I use Easley and O’Hara's [1992, Journal of Finance 47, 577–604] private information-based trading variable, PIN, together with a comprehensive public news database to empirically measure the effect of private and public information on the post-announcement drift. I show that stocks associated with high PIN, consensus public news surprises, and low media coverage experience low or insignificant drift. Thus not all information acquisition variables have the same effect on the market's efficiency. Whether information is public or private is irrelevant; what matters is whether information is associated with the arrival rate of informed or uninformed traders.
We examine the press’ role in monitoring and influencing executive compensation practice using more than 11,000 press articles about CEO compensation from 1994 to 2002. Negative press coverage is more strongly related to excess annual pay than to raw annual pay, suggesting a sophisticated approach by the media in selecting CEOs to cover. However, negative coverage is also greater for CEOs with more option exercises, suggesting the press engages in some degree of “sensationalism.” We find little evidence that firms respond to negative press coverage by decreasing excess CEO compensation or increasing CEO turnover.
We examine the effect of underwriting relationships on analysts' earnings forecasts and recommendations. Lead and co-underwriter analysts' growth forecasts and recommendations are significantly more favorable than those made by unaffiliated analysts, although their earnings forecasts are not generally greater. Investors respond similarly to lead underwriter and unaffiliated `Strong buy' and `Buy' recommendations, but three-day returns to lead underwriter `Hold' recommendations are significantly more negative than those to unaffiliated `Hold' recommendations. The findings suggest investors expect lead analysts are more likely to recommend `Hold' when `Sell' is warranted. The post-announcement returns following affiliated and unaffiliated analysts' recommendations are not significantly different.
Prior studies have identified systematic and time persistent differences in analysts’ earnings forecast accuracy, but have not explained why the differences exist. Using the I/B/E/S Detail History database, this study finds that forecast accuracy is positively associated with analysts’ experience (a surrogate for analyst ability and skill) and employer size (a surrogate for resources available), and negatively associated with the number of firms and industries followed by the analyst (measures of task complexity). The results suggest that analysts’ characteristics may be useful in predicting differences in forecasting performance, and that market expectations studies may be improved by modeling these characteristics.
This paper presents a parameter covariance matrix estimator which is consistent even when the disturbances of a linear regression model are heteroskedastic. This estimator does not depend on a formal model of the structure of the heteroskedasticity. By comparing the elements of the new estimator to those of the usual covariance estimator, one obtains a direct test for heteroskedasticity, since in the absence of heteroskedasticity, the two estimators will be approximately equal, but will generally diverge otherwise. The test has an appealing least squares interpretation.
A Sunday New York Times article on a potential development of new cancer-curing drugs caused EntreMed's stock price to rise from 12.063 at the Friday close, to open at 85 and close near 52 on Monday. It closed above 30 in the three following weeks. The enthusiasm spilled over to other biotechnology stocks. The potential breakthrough in cancer research already had been reported, however, in the journal Nature, and in various popular newspapers (including the Times) more than five months earlier. Thus, enthusiastic public attention induced a permanent rise in share prices, even though no genuinely new information had been presented.
We investigate the (sell-side) analyst rankings of Institutional Investor (I/I) and The Wall Street Journal (WSJ), using data from 1993–2005. We find that factors with a primary component of recognition are the most important determinants of the rankings, although performance measures are statistically significant determinants in some cases. The single exception to this finding is with existing WSJ stars, where industry-adjusted investment-recommendation performance is the only significant determinant of repeating as a star. Further, in the year after becoming stars, the recommendations of WSJ stars are significantly worse than those of nonstars; and the recommendations and earnings forecasts of I/I stars, as well as the earnings forecasts of WSJ stars, are not significantly different from those of nonstars. We conclude that these rankings are largely “popularity contests.”
ABSTRACT This paper investigates whether the business press serves as an information intermediary. The press potentially shapes firms' information environments by packaging and disseminating information, as well as by creating new information through journalism activities. We find that greater press coverage reduces information asymmetry (i.e., lower spreads and greater depth) around earnings announcements, with broad dissemination of information having a bigger impact than the quantity or quality of press-generated information. These results are robust to controlling for firm-initiated disclosures, market reactions to the announcement, and other information intermediaries. Our findings suggest that the press helps reduce information problems around earnings announcements. Copyright (c), University of Chicago on behalf of the Accounting Research Center, 2009.
We examine whether the quality differentials in earnings forecasts between reputable and nonreputable analysts vary with the
severity of conflicts of interest. We measure personal reputation using the Institutional Investor All-American (AA) awards,
and bank reputation using Carter-Manaster ranks. While both personal and bank reputation are associated with higher quality
forecasts overall, their effectiveness against conflicts of interest differs. The severity of conflicts has a negative and
significant effect on the performance of non-AAs at top-tier banks relative to other analysts, while it has a positive and
significant effect on the performance of AAs at top-tier banks relative to others. Thus personal reputation is an effective
disciplinary device against conflicts of interest, while bank reputation alone is not.