How Do Analyst Recommendations Respond to Major News?

We examine how analysts respond to public information when setting stock recommendations. We model the determinants of analysts’ recommendation changes following large stock price movements. We find evidence of an asymmetry following large positive and negative returns. Following large stock price increases, analysts are equally likely to upgrade or downgrade. Following large stock price declines, analysts are more likely to downgrade. This asymmetry exists after accounting for investment banking relationships and herding behavior. This result suggests recommendation changes are “sticky” in one direction, with analysts reluctant to downgrade. Moreover, this result implies that analysts’ optimistic bias may vary through time

Measuring Securities Market Efficiency in the Regulatory Setting

In Nov 1998, the SEC proposed a modification to the federal securities law disclosure requirements to facilitate the process of issuing new securities. Thomas and Cotter discuss how to determine when companies should be able to issue simplified disclosure documents

Royal Ahold: A Failure of Corporate Governance and an Accounting Scandal

Royal Ahold (Koninklijke Ahold NV) was one of the major success stories in the 1990s and is one of the major failures, suffering a complete meltdown, in 2003.We investigate the strategy, accounting transparency and corporate governance of Ahold; elements which jointly drive the firm s performance over this period of time.In general, the corporate governance, accounting transparency, strategy and firm performance relationships are complex.There is not a fully specified model available to address the inter-relationships, including the endogeneity problem.The econometrics are difficult and constrained not only by the lack of a fully specified theory but also by data availability. Our clinical study overcomes these problems by providing an in-depth analysis of the inter-relationships among corporate governance, accounting transparency and strategy that lead to Ahold s downfall.We provide insights into these relationships and their complexity that present theory and empirical studies cannot address.international economics;financial economics;financial reporting;law and economics;corporate governance;regulation

User adoption of a CRM-based information system within a financial services organisation: An empirical analysis

Financial Services firms require processes and systems which can support and maintain customer-related information for the purposes of core business-focussed activity. Specifically within the investment banking sector, the importance and criticality of such customer information underpins the firm’s ability to transact sales, trading and other advisory-based services in an efficient and relevant manner. The design and development of Customer Relationship Management (CRM) systems to address the given external vs. internal customer information touchpoints, therefore provides a vital link between financial services professionals, client data and business processes. In doing so, the input of CRM user requirements is a key step in deriving benefit from such a technology solution. This paper henceforth identifies and details user requirements and experiences of such an information system within a case study company and highlights pertinent issues for the adoption of such systems within the given secto

The Impact of Voluntary Disclosures on Sell-Side Analyst Stock Recommendations: Australian Experience

This paper investigates the impact of voluntary disclosures on sell-side analyst stock recommendations. It uses content analysis method to measure quality of information disclosures and emphasis on particular themes. The focus of this study is on changes in analyst recommendations and the new information disclosures that have been made public since the previous revision of recommendation. The proxies for voluntary disclosures are information released by firms via company announcements and associated media reports. The characteristics of these disclosures are examined to explore their impact on the changes in analystsÌ stock recommendations. Based on a sample of over 200 recommendation revisions of 40 listed Australian companies, the results suggest that voluntary disclosures do contribute to analyst stock revisions. The findings reveal that the quantity of disclosures is positively associated with the number of recommendation revisions, and that disclosures with favourable signals or with price-sensitive contents are significantly related to the direction and type of analyst revisions. In addition, disclosure of specific themes (e.g., dividend and product) in company announcements and news are significantly associated with the recommendation change. This has implications for both the formulation of accounting policies and the regulation of financial disclosure. Acknowledgements: The authors acknowledge the support of Thomson Financial in the conduct of this research through their provision of data from the Institutional Brokers Estimate System (I/B/E/S) service. This data has been provided as part of a broad academic program to encourage earnings expectation research. The authors acknowledge the helpful comments from participants at the BAA Annual Conference (2004), University of York.Thai takeovers, bidding firms, control portfolios, bootstrapped t-tests

Estimating the expected cost of equity capital using consensus forecasts

In this study, we develop a technique for estimating a firm’s expected cost of equity capital derived from analyst consensus forecasts and stock prices. Building on the work of Gebhardt/Lee/-Swaminathan (2001) and Easton/Taylor/Shroff/Sougiannis (2002), our approach allows daily estimation, using only publicly available information at that date. We then estimate the expected cost of equity capital at the market, industry and individual firm level using historical German data from 1989-2002 and examine firm characteristics which are systematically related to these estimates. Finally, we demonstrate the applicability of the concept in a contemporary case study for DaimlerChrysler and the European automobile industry

On the timeliness of price discovery

Price discovery is the process whereby value-relevant, private information becomes impounded or reflected in a stock's publicly-observable market price. The timeliness of price discovery refers to how quickly that process takes effect. There is no reason to believe either that all private information is discovered equally quickly or that price discovery is equally speedy for all firms. The latter observation suggests it would be worthwhile knowing why the timeliness of price discovery differs across firms, even the more so in an environment where all listed companies by law must disclose most material price-sensitive information as soon as they become aware of it. The other observation, that not all private information is discovered equally quickly, implies we should focus on a material, periodic event when we compare timeliness across firms. A good candidate is the announcement of the company's annual results, since for many years is has been known that annual earnings alone captures at least half the value-relevant information released by the average firm over the 12 months leading up to this date. We use various approaches to explore measures of timeliness and what they can tell us. We review a number of studies that have considered various aspects of timeliness in different countries and extend and contrast their findings. We also examine the relationship between the timeliness of price discovery and analogous measures based upon firms' formal disclosures to the share market and upon analysts' consensus earnings forecasts. Finally, we report on an issue of major concern to regulators and market operators, namely the influence of corporate governance on the timeliness of price discovery

Financial Risks of Investments in Coal

Analyzes the regulatory, commodity, and construction risks of investing in coal mining and coal-fired power plants. Examines industry analysts' consensus on viable alternatives to coal, including natural gas, solar, wind, and energy efficiency

The Real Effects of Investor Sentiment

We study how stock market mispricing might influence individual firms' investment decisions. We find a positive relation between investment and a number of proxies for mispricing, controlling for investment opportunities and financial slack, suggesting that overpriced (underpriced) firms tend to overinvest (underinvest). Consistent with the predictions of our model, we find that investment is more sensitive to our mispricing proxies for firms with higher R&D intensity suggesting longer periods of information asymmetry and thus mispricing) or share turnover (suggesting that the firms' shareholders are short-term investors). We also find that firms with relatively high (low) investment subsequently have relatively low (high) stock returns, after controlling for investment opportunities and other characteristics linked to return predictability. These patterns are stronger for firms with higher R&D intensity or higher share turnover.