Do Analysts Herd? An Analysis of Recommendations and Market Reactions

This paper develops and implements a new test to investigate whether sell-side analysts herd around the consensus when they make stock recommendations. Our empirical results support the herding hypothesis. Stock price reactions following recommendation revisions are stronger when the new recommendation is away from the consensus than when it is closer to it, indicating that the market recognizes analysts' tendency to herd. We find that analysts from larger brokerages and analysts following stocks with smaller dispersion across recommendations are more likely to herd.

Profitability of Momentum Strategies: An Evaluation of Alternative Explanations

This paper evaluates various explanations for the profitability of momentum strategies documented in Jegadeesh and Titman (1993). The evidence indicates that momentum profits have continued in the 1990's suggesting that the original results were not a product of data snooping bias. The paper also examines the predictions of recent behavioral models that propose that momentum profits are due to delayed overreactions which are eventually reversed. Our evidence provides support for the behavioral models, but this support should be tempered with caution. Although we find no evidence of significant return reversals in the 2 to 3 years following the following formation date, there are significant return reversals 4 to 5 years after the formation date. Our analysis of post-hiding period returns sharply rejects a claim in the literature that the observed momentum profits can be explained completely by the cross-sectional dispersion in expected returns.

Risk and expected returns of private equity investments : evidence based on market prices

We estimate the risk and expected returns of private equity investments based on the market prices of exchange traded funds of funds that invest in unlisted private equity funds. Our results indicate that the market expects unlisted private equity funds to earn abnormal returns of about one to two percent. We also find that the market expects listed private equity funds to earn zero to marginally negative abnormal returns net of fees. Both listed and unlisted private equity funds have market betas close to one and positive factor loadings on the Fama-French SMB factor. Private equity fund returns are positively correlated with GDP growth and negatively correlated with the credit spread. Finally, we find that market returns of exchange traded funds of funds and listed private equity funds predict changes in self-reported book values of unlisted private equity funds

An analysis of bidding in the Japanese government bond auctions

There has been constant friction between the U.S. and Japan on economic issues. After lengthy negotiations and threats of reprisal, Japan agreed to sell its Government Bonds through auctions that were open to foreign competition. This paper examines the bidding patterns in the Japanese Government Bond (JGB) auctions and it empirically tests the predictions of auction theory with JGB auction data. While the winning share of U.S. firms in 10-year JGB auction market went through ups and downs, their share in the 20-year market has increased steadily. We find that the winning shares of the U.S. investment banks are positively related to auction profits, whereas the winning shares of their Japanese counterparts show a negative association. We also find that the share of winnings of Japanese investment banks tend to be correlated with winnings of their compatriot investment banks but a similar relation is not found for US investment banks. We offer some possible explanations for these findings. The average profit in JGB auctions is not reliably different from zero, and the degree of competition and the level of uncertainty are found to be insignificant in determining auction profits

An analysis of bidding in the Japanese government bond auctions

There has been constant friction between the U.S. and Japan on economic issues. After lengthy negotiations and threats of reprisal, Japan agreed to sell its Government Bonds through auctions that were open to foreign competition. This paper examines the bidding patterns in the Japanese Government Bond (JGB) auctions and it empirically tests the predictions of auction theory with JGB auction data. While the winning share of U.S. firms in 10-year JGB auction market went through ups and downs, their share in the 20-year market has increased steadily. We find that the winning shares of the U.S. investment banks are positively related to auction profits, whereas the winning shares of their Japanese counterparts show a negative association. We also find that the share of winnings of Japanese investment banks tend to be correlated with winnings of their compatriot investment banks but a similar relation is not found for US investment banks. We offer some possible explanations for these findings. The average profit in JGB auctions is not reliably different from zero, and the degree of competition and the level of uncertainty are found to be insignificant in determining auction profits

Word Power: A New Approach for Content Analysis

We present a new approach for content analysis to quantify document tone. We find a significant relation between our measure of the tone of 10-Ks and market reaction for both negative and positive words. We also find that the appropriate choice of term weighting in content analysis is at least as important as, and perhaps more important than, a complete and accurate compilation of the word list. Furthermore, we show that our approach circumvents the need to subjectively partition words into positive and negative word lists. Our approach reliably quantifies the tone of IPO prospectuses as well, and we find that the document score is negatively related to IPO underpricing

Gender and Job Performance: Evidence from Wall Street

We study the relation between gender and job performance among brokerage firm equity analysts. Women's representation in analyst positions drops from 16% in 1995 to 13% in 2005. We find women cover roughly 9 stocks on average compared to 10 for men. Women's earnings estimates tend to be less accurate. After controlling for forecast characteristics, the difference in accuracy is roughly equivalent to four years of experience. Despite reduced coverage and lower forecast accuracy, we find women are significantly more likely to be designated as All-Stars, which suggests they outperform at other aspects of the job such as client service.

Earnings Quality and Stock Returns

An exclusive focus on bottom-line income misses important information about the quality of earnings. Accruals (the difference between accounting earnings and cash flow) are reliably, negatively associated with future stock returns. Earnings increases that are accompanied by high accruals, suggesting low-quality earnings, are associated with poor future returns. We explore various hypotheses -- earnings manipulation, extrapolative biases about future growth, and under-reaction to business conditions -- to explain accruals' predictive power. Distinctions between the hypotheses are based on evidence from operating performance, the behavior of individual accrual items, and discretionary versus nondiscretionary components of accruals.

Risk and Expected Returns of Private Equity Investments: Evidence Based on Market Prices

We estimate the risk and expected returns of private equity investments based on the market prices of exchange-traded funds of funds that invest in unlisted private equity funds. Our results indicate that the market expects unlisted private equity funds to earn abnormal returns of approximately 1% per year. We also find that the market expects listed private equity funds to earn zero or marginally negative abnormal returns net of fees. Both listed and unlisted private equity funds have market betas close to one and positive factor loadings on the Fama-French SMB factor. Private equity fund returns are positively related to GDP growth and negatively related to the credit spread. In addition, we find that market returns of exchange traded funds of funds and listed private equity funds predict changes in self-reported book values of unlisted private equity funds.