The impact of analyst sentiment on UK stock recommendations and target prices

© 2015 Taylor & Francis. The aim of this paper is to investigate the relationship between narrative sentiment in analysts' company reports and their recommendation and target price outputs. We study an industry-balanced sample of 275 UK quoted company sell-side analyst reports over the period 2006-2010 using a content analysis methodology to measure net sentiment for a range of themes. We then model analysts' outputs against themed sentiment scores to analyse the impact of the Global Financial Crisis. We find that themed sentiments impact upon analysts' outputs, but their magnitude and direction vary over the pre-crisis, crisis and post-crisis periods. In particular, before the crisis we find a strong negative relationship between the macroeconomic and regulatory environment and report outputs, though this effect diminishes somewhat with the onset of the crisis, to be restored thereafter. Growth sentiment exerts a weak positive impact before the crisis which disappears thereafter. Financial performance sentiment becomes a significant positive driver of outputs following the crisis. There is evidently a "back to basics" approach following the crisis which restores financial fundamentals to the heart of stock analysis. Our findings provide some insight into the thought processes of analysts by identifying the dynamic relation between analysts' outputs and themed sentiments

Financial estimates against investors’ preferences:anchoring, denial and spillover effects

This experimental study investigates how the characteristics of an estimate in a sensitivity disclosure and the level of threat it presents to investors' preferences interact to influence investors’ risk judgments. Firstly, I predict and find that variation in an estimate affects not only investors’ judgment on a related issue but also their future judgments on an unrelated issue. Secondly, I predict and find that investors are more sensitive to variations in an estimate when information contained in the estimate presents less threat to their preferred conclusions than when it presents greater threat. Finally, I predict and find that investors perceive more uncertainty regarding the association between the disclosed risk factor and the estimated financial reporting item in the estimate when the information presents greater threat

Future Realized Return, Firm-Specific Risk and the Implied Expected Return

ArticleThis is the author accepted manuscript. The final version is available from Wiley via the DOI in this record.In this paper, we propose a novel approach to derive a firm-specific measure of expected return. It builds on recent accounting-based valuation models developed by Clubb (2013) and Ashton and Wang (2013). The measure is intrinsically linked to commonly used financial ratios including book-to-market, (forward) earnings yield, dividend-to-price as well as growth and past returns. The empirical evidence shows that it is significantly positively associated with future realized stock returns and also significantly correlates with commonly used risk characteristics in a theoretically predictable manner. The results are likely to be of interest to practitioners and managers in making capital allocation decisions and to academics in need of proxies for firms’ discount rates and expected returns

The effect of carbon dissemination on cost of equity

This study examines whether firms can influence their cost of equity (COE) by broadly disseminating their carbon information over Twitter. We study firms' dissemination decisions of carbon information by developing a comprehensive measure of carbon information that a firm makes on Twitter, referred to as iCarbon . Using a sample of 1,737 firm‐year observations for 584 nonfinancial firms with a Twitter account and listed on the U.S. NASDAQ stock exchange over the period 2009–2015, we find that iCarbon is significantly and negatively associated with COE. Our results are consistent after determining the effect of Bloomberg's environmental and environmental, social, and governance disclosure. The findings also hold when using alternative measures of COE and iCarbon

Implied cost of capital investment strategies - evidence from international stock markets

Investors can generate excess returns by implementing trading strategies based on publicly available equity analyst forecasts. This paper captures the information provided by analysts by the implied cost of capital (ICC), the internal rate of return that equates a firm's share price to the present value of analysts' earnings forecasts. We find that U.S. stocks with a high ICC outperform low ICC stocks on average by 6.0% per year. This spread is significant when controlling the investment returns for their risk exposure as proxied by standard pricing models. Further analysis across the world's largest equity markets validates these results

Outperforming markets: IC and the long-term performance of Japanese IPOs

This article studies the effects of disclosure practices of Japanese IPO prospectuses on long-term stock performance and bid–ask spread, as a proxy for cost of capital, after a company is admitted to the stock exchange. A disclosure index methodology is applied to 120 IPO prospectuses from 2003. Intellectual capital information leads to significantly better long-term performance against a reference portfolio, and is thus important to the capital market. Further, superior disclosure of IC reduces bid–ask spread in the long-term, indicating that such disclosures are important in an IPO setting. Analysts and investors can attain higher long-term returns by understanding IC

Disentangling the Effects of Corporate Disclosure on the Cost of Equity Capital: A Study of the Role of Intellectual Capital Disclosure

In this article, we investigate whether intellectual capital (IC) and financial disclosures jointly affect the firm’s cost of equity capital. In contrast to prior research, we disaggregate disclosures into IC and financial disclosures and examine whether the two disclosure types are jointly related to the cost of equity capital. We also investigate whether IC and financial disclosures have an interaction effect on the cost of equity capital. Using data for a sample of 125 U.K. firms, we find a negative relationship between the cost of equity capital and IC disclosure. We find that the relationship between financial disclosure and the cost of equity capital is magnified when combined with IC disclosure. In addition, we find that IC and financial disclosures interact in shaping their effects on the cost of equity capital. Further analyses suggest that the effect of financial disclosure on the cost of equity capital is augmented for firms characterized by a medium level of IC disclosure. These results provideimportant insights into the relationship between disclosures and cost of equity capital and have policy and practical implications

An investigation of the impact of data breach severity on the readability of mandatory data breach notification letters: evidence from U.S. firms

The aim of this article is to investigate the impact of data breach severity on the readability of mandatory data breach notification letters. Using a content analysis approach to determine data breach severity attributes (measured by the total number of breached records, type of data accessed, the source of the data breach, and how the data were used), in conjunction with readability measures (reading complexity, numerical intensity, length of letter, word size, and unique words), 512 data breach incidents from 281 U.S. firms across the 2012–2015 period were examined. The results indicate that data breach severity has a positive impact on reading complexity, length of letter, word size, and unique words, and a negative impact on numerical terms. Interpreting the results collectively through the lens of impression management, it can be inferred that business managers may be attempting to obfuscate bad news associated with high data breach severity incidents by manipulating syntactical features of the data breach notification letters in a way that makes the message difficult for individuals to comprehend. The study contributes to the information studies and impression management behavior literatures by analyzing linguistic cues in notifications following a data breach incident