14 Financial: Stock Analysts
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ItemThe Effects of Reporting Frequency on Analyst Coverage Decisions( 2019-08-29)Using hand-collected data on analyst coverage decisions, we study how changes in reporting frequency affect analyst coverage decisions for European firms along with the impact on their forecast performance. Following the enactment of the Transparency Directive, we find that analysts’ expertise, with respect to greater reporting frequency, significantly influences the coverage decision. Particularly, analysts, with higher levels of disclosure expertise, are 150% more likely to initiate new coverage for firms that increase their disclosure frequency. Moreover, we identify that this type of analyst primarily produces firm-specific information as their initiations lead to increased firm-specific volatility, which signals more information-laden stock prices. Subsequently, analysts also provide significantly more accurate forecast on firms with changes in their reporting frequency. Overall, our findings indicate that reporting frequency not only directly impacts the available information about a firm, but also indirectly, by affecting the strategic coverage decisions of information intermediaries.
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ItemBuying Analyst and Investor Attention through IPO Proceeds( 2019-08-14)We examine the effect of IPO proceeds on the post-IPO information environment. We exploit variation in the amount of capital raised across IPOs that is unrelated to firm size and manager decisions using an instrumental variable approach, and find that marginal increases in IPO proceeds lead to large increases in analyst coverage and institutional ownership in the first two years a firm is public. Increases in IPO proceeds also lead to more frequent follow-on offerings and longer survival as a public firm. We find evidence that immediate shocks to ownership diversification represent one plausible channel through which changes in IPO proceeds affect long-run visibility and investor demand. Overall, our findings highlight important rewards to selling additional shares at the IPO.
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ItemCareer Experience and Executive Performance: Evidence from Former Equity Research Analysts( 2019-07-09)This study examines CEOs and CFOs who have prior work experience as equity research analysts. Consistent with backgrounds in forecasting and valuation, we find these executives provide earnings guidance that is more accurate than that of other executives, and their M&A transactions generate significantly higher announcement returns. For available CEOs and CFOs, we examine their track records as research analysts with respect to forecasting accuracy and stock recommendation profitability. We find a positive association between a record of past forecasting accuracy and more accurate earnings guidance, as well as a positive association between past stock recommendation profitability and M&A announcement returns. Beyond these traits, we find these executives provide greater certainty in their answers to analysts during conference calls, especially when answering forward-looking questions. Finally, these executives’ firms exhibit superior accounting and stock return performance. Overall, our evidence suggests early career skill sets can shape top executive performance outcomes.
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ItemDo Connections with Buy-Side Analysts Inform Sell-Side Analyst Research?( 2019-06-18)Prior research suggests that private information developed by an institutional investor’s buy-side analysts becomes public only through observation of fund manager trading decisions. We identify another pathway. Specifically, we hypothesize that buy-side analyst connections with sell-side analysts offer the sell-side a view of the buy-side’s private information, thus enhancing the quality of sell-side research output. We proxy for these connections with the weighted number of stocks at the intersection of stocks held in the portfolios of institutional investors and followed by the sell-side analyst. The larger this intersection, the more opportunities the sell-side analyst has to interact with institutional investors. We proxy for the research quality of the sell-side analyst with her earnings forecast accuracy. We find that such connections enhance the accuracy of earnings forecasts, but up to a point of diminishing returns. Additional tests rule out reverse causality and omitted variables as explanations for the association and strengthen the inference that connections between sell- and buy-side analysts increase the flow of information and improve the quality of sell-side research output.
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ItemBroker Trading Volume: A Conflict of Interest?( 2019-04-21)Using unique new data, we examine whether brokerage trading volume creates a conflict of interest for analysts. We find that earnings forecast optimism is associated with higher brokerage volume, even controlling for forecast and analyst quality, recommendations, and target prices. However forecast accuracy is also significantly associated with higher volume. When analysts change brokerage firms, they bring trading volume with them, influencing trading volume at the new brokerage house. This indicates that analysts drive the volume effects we observe. Consistent with a reward for generating volume, brokerage houses are less likely to demote analysts who generate more volume. Finally, analysts strategically adjust forecast optimism based on expected volume impact. Analysts become more (less) optimistic if their optimistic forecasts in the prior year were more (less) successful at generating volume. However, consistent with higher costs to increasing accuracy, analysts do not update accuracy based on expected volume impact. Overall, our results are consistent with a brokerage trading volume conflict of interest moving analysts towards more optimistic earnings forecasts, despite the volume reward for accuracy.