10 Financial: Managerial ability (including CEO reputation)/Stock analysts
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ItemDCF Please! Evidence from a Content Analysis of Analyst Reports( 2018-09-01)Using textual analysis for a large sample of analyst reports, we find that analysts are more likely to use DCF model than PE model and engage in more cash flow and discount rate discussions when investors have a stronger demand for value-relevant information. The market reactions to analyst investment opinions based on DCF model are stronger than those based on PE model, especially when the DCF model is accompanied by more cash flow and discount rate discussions. These results indicate that analysts’ valuation process reflects investor demand for value-relevant information and has a bearing on the quality of their research
ItemHappy Analysts( 2018-08-31)This paper is the first to investigate the role of work-life balance in financial analysts’ performance and career advancement. Using a large sample of Glassdoor reviews by financial analysts, we find a significant non-linear relation between broker-level work-life balance satisfaction and analyst performance and analyst career advancement. Specifically, when work-life balance satisfaction is relatively low, an increase in work-life balance is associated with better analyst performance and career advancement; however, when perceived work-life balance is already high, a further increase in work-life balance is associated with worse analyst performance and career advancement. We make further use of detailed LinkedIn data and measure work-life balance at the broker-office-level and find consistent results.
ItemVoice and Action: Sell-Side Analysis and Hedge Fund Activism( 2018-08-31)Recent literature has shown hedge fund activism to be an important external corporate governance mechanism. Sell-side analysts, however, provide idea generation and analysis to buy-side clients including hedge funds. Using a propensity score matched sample, we examine sell-side analyst activity around hedge fund activism. We find that declining trends in analyst coverage begin in the year before hedge fund intervention and continue afterward. Stock market responses to analyst reports are negative before hedge fund intervention but revert to positive after. We introduce a new textual analysis dictionary to identify the activism objectives and tactics of Brav, Jiang, Partnoy, and Thomas (2008) within analyst reports and show pre-event sell-side reports contain significantly more language related to subsequent activism. Higher activism dictionary content in sell-side reports is correlated with activism-date target stock performance and predicts multiple activist interventions. Our results suggest that critical voice of sell-side analysis reveals coverage firm flaws that influence subsequent hedge fund intervention outcomes.
ItemAre Managers 'Under-the-Weather' During Earnings Conference Calls?( 2018-08-29)Earnings conference calls represent an important communication channel between managers and investors. We examine the impact of weather-induced mood on manager behavior during these calls. Using a large sample of earnings conference calls from 2006 to 2017, we find managers speak more negatively and with less (more) quantitative information (uncertainty) when local weather conditions are bad. We further identify that this negative relation is less pronounced for CFOs than CEOs. Financial expertise mitigates negative behavior bias induced by weather and we confirm with subgroups of CEOs with previous financial experience. We document a significantly negatively market reaction to weather-induced behavior that cannot be explained by existing textual analysis methods. Our results remain significant after adding controls for investor mood, separating firms into those from big and small states, mediation tests, firm fixed effects, and propensity score matching. Taken together, our findings suggest that exogenous effects of bad weather significantly impact manager behavior that the market views negatively.
ItemPilot CEOs and Corporate Cash Holdings( 2018-08-29)We examine the effect of situation awareness developed from aviation training and experiences on corporate cash policies. We find that firms led by pilot CEOs are more likely to have higher cash holdings and higher market value of cash holdings. The findings suggest that pilot CEOs have greater situation awareness, and that these CEOs are more likely to plan ahead to cope with future liquidity needs. In addition, we find that the level of pilot certification is associated with corporate cash holdings and the value of cash holdings. These findings provide further evidence that situation awareness can be developed through training and aviation experience. We also find that the effect of pilot CEOs on corporate cash holdings is more pronounced for firms with high growth opportunities and firms with financial constraints. These results indicate that pilot CEOs tend to hold more cash when they are aware of future opportunities and risks.
ItemForecast Walk-Downs and Strategic Incentives for Bias( 2018-08-24)Are strategic incentives for bias among forecasters a necessary condition for forecast walk-downs? We identify the group of professional macro forecasters affiliated with the Federal Reserve System as a setting where forecasters are free from strategic incentives for bias. Unlike sell-side analysts, who have incentives to curry favor with management when forecasting firm-level profits, this group of professional macro forecasters faces strong incentives to produce unbiased forecasts of the U.S. economy. Remarkably, however, we document a walk-down in their GDP growth forecasts, even after excluding the corporate profit component of U.S. output. Whereas most prior explanations for forecast walk-downs are conditioned on preexisting incentives for bias, we find that asymmetrically high forecasting difficulty in downturns relative to upturns of the U.S. economy can explain the macro walk-down even in the absence of such incentives. Overall, our paper contests the traditional view of forecast walk-downs as de facto evidence of strategic incentives for bias. Time-series and cross-sectional tests further illustrate the relevance of our findings for firm-level studies. One overarching implication is that research on sell-side analysts’ forecasts should consider strategic incentives for bias alongside information about the state of the U.S. economy and heterogeneity in the cyclical exposure of individual firms to macro fluctuations.