08 Financial Accounting 1: Stock Analysts/Equity Valuation

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    Public Disclosure of Private Meetings: Does Transparency of Corporate Site Visits affect Analysts' Attention Allocation?
    ( 2020-08-16) Zou, Yuan ; Ru, Yi ; Zheng, Ronghuo
    We investigate the consequences of increased transparency of corporate site visits on financial analysts' attention allocation. Using the timely disclosure requirement by the Shenzhen Stock Exchange (SZSE) in China since July 2012 as a setting, we find that non-visiting analysts reduce attention allocated to visited firms relative to non-visited firms. These results are consistent with the conjecture that such transparency reveals the information advantage of visiting analysts relative to non-visiting analysts, who then reallocate attention across different firms. Cross-sectional analyses suggest that the effects are more pronounced when the information advantage is larger. Further evidence suggests that such transparency has positive spillover effects on peer firms' informational efficiency by influencing analysts' attention allocation. Thus, despite the potential disclosure costs directly imposed on firms, firms collectively can benefit from this disclosure requirement due to the positive spillover effects.
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    Scenario-based systematic risk in earnings
    ( 2020-08-15) Green, Jeremiah ; Zhao, Wanjia
    We develop a scenario-based measure of risk in earnings. We start by forming a range of scenarios, or plausible states of the economy, represented by earnings persistence parameters from cross-sectional earnings prediction regressions. We then combine out-of-sample earnings components with these scenarios to predict earnings. The standard deviation of predicted earnings of all scenarios is our firm-year risk measure, sigma. We demonstrate that $\sigma$ captures systematic risk in earnings and that our measure complements firm characteristics that have been proposed as measures of risk in predicting cross-sectional returns. The differential one-year returns of the interquartile range for $\sigma$ is 1.9\%. We contribute to the literature by developing a priced scenario-based risk measure using only fundamental information.
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    Why Don't Analysts Always Value Earnings Conference Calls?
    ( 2020-08-15) Basu, Sudipta ; Xiang, Zhongnan
    We compare analyst forecasts before earnings releases, between earnings releases and conference calls, and after conference calls, and unexpectedly find that the forecasts do not become more accurate or less dispersed around conference calls. We propose and show that analysts ignore potential information in conference calls if they got prior access to private information. Analyst forecasts between earnings releases and conference calls are associated with less market movement during conference calls. Our results suggest that some analysts have superior information access before a few open conference calls. We show that public disclosure is sometimes preempted by private information channels and implicitly question the effectiveness of disclosure regulation.
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    Do Analysts Cater to Investor Beliefs? Evidence from Dual-Listed Chinese Firms
    ( 2020-08-14) Matsumoto, Dawn ; Zhang, Jenny Li ; Zheng, Yuxiang
    We take advantage of a unique setting in China to provide novel evidence on a catering theory for analyst optimism. Our study utilizes the Stock Connect programs that allowed foreign investors to invest in Chinese stocks as an exogenous shock to investor beliefs. We further focus our study on a subset of Chinese firms with both "A shares" (listed in mainland China) and "H shares" (listed in Hong Kong) to provide a clean test of our hypotheses. We find that A share analysts become less optimistic in their recommendations following the introduction of less optimistic investors through the Stock Connect programs. In addition, catering theory predicts that when investors hold heterogeneous beliefs, analysts tend to segment the market and slant toward extreme positions in order to attract target investors. Consistent with this prediction, we find that A share analysts with buy or strong buy (sell or underperform) recommendations of a given firm become more optimistic (pessimistic) in their forecasts and research report tone after the Stock Connect programs. Finally, we show that in updating their earnings forecasts, analysts are more (less) responsive to earnings surprises that are consistent (inconsistent) with their stock recommendations. Overall, the results suggest that analysts cater to investors' opinions.
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    Going Digital: Implications for Firm Value and Performance
    ( 2020-08-13) Srinivasan, Suraj ; Chen, Wilbur
    We examine firm value and performance implications of the growing trend of non-technology companies adopting digital technologies, using a measure based on the disclosure of digital words in the business description section of 10-Ks. Digital adoption is associated with a market-to-book ratio 8-26% higher than industry peers. Part of the differences in market-to-book is explained by accounting capitalization restrictions, which we estimate to explain roughly 15% of the differences. Portfolios formed on digital disclosure earn a DGTW-adjusted return of 36% over a 3-year horizon and a monthly alpha of 57-basis-points. We also find significant increases in asset turnover conditional on digital activities, while also finding significant declines in margins and sales growth.