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Abstract:
In this paper we provide insights into the manner in which (relatively sparse) accounting information, along with measures of internet usage, are employed by the market in the valuation of internet firms. Consistent with those who claim that financial statement information is of very limited use in the valuation of internet stocks, we are unable to detect a significant positive association between bottom-line net income and our sample firms' market prices; in fact, the association is actually negative. However, when we decompose net income into its components, we find gross profits to be positively and significantly associated with prices. In addition, both unique visitors and pageviews, as measures of internet usage, are found in most instances to provide incremental explanatory power (in some cases considerable) for stock prices. We also separately analyze the e-tailers, and the portal and content/community firms (the p/c firms) in our sample. For the e-tailers we find that bottom-line net income generally has a negative association with stock prices (as for the sample as a whole), while a positive and significant association exists for the p/c firms. In this respect, p/c firms' shares behave more like those of non-internet companies. Further, we find for the p/c firms that the incremental explanatory power of pageviews and of unique visitors is approximately the same; in contrast, pageviews has much greater incremental explanatory power for the e-tailers than does unique visitors. This suggests that pages viewed per visitor is an especially important metric for the e-tailers, as compared to the p/c firms.

Abstract:
In this paper we document that an investment strategy based on the consensus (average) analyst recommendations of security analysts earns positive returns. For the period 1986-1996, a portfolio of stocks most highly recommended by analysts earned an annualized geometric mean return of 18.8 percent, while a portfolio of stocks least favorably recommended earned only 5.78 percent. (In comparison, an investment in a value-weighted market index earned an annualized geometric mean return of 14.5 percent.) Alternatively stated, purchasing stocks most highly recommended yielded a return of 102 basis points per month. The magnitude of this return is surprisingly large, and is far greater than the size effect (negative 16 basis points) and book-to-market effect (17 basis points) for the same period. Even after controlling for these two effects, as well as for price momentum, we show that the strategy of purchasing stocks most highly recommended and selling short those least favorably recommended yielded a return of 75 basis points per month. These results are robust to partitions by time period and overall market direction, and are most pronounced for small and medium-sized firms. The abnormal returns also persist when we allow a lapse of up to 15 days before acting on the investment recommendations. There is no extant theory of asset pricing that explains these results.

Abstract:
In light of the importance of revenues in the valuation of internet stocks, this paper examines the roles played by analysts, past revenues, and web usage data (unique visitors, pageviews, and minutes spent at a firm's web sites) in the forecasting of future revenues. In contrast to evidence from other industries, we find that analysts' revenue forecasts almost always underestimate the revenues of internet firms. Historical revenue growth is shown to have incremental predictive power over analysts' forecasts, more so for our sample of portal and content/community firms than for our e-tailer sample. Estimates of web usage growth, on the other hand, generally have significant incremental value for predicting the revenues of the e-tailers, but little predictive power for the revenues of the p/c firms. Finally, we examine whether measures of web traffic have incremental value in the prediction of revenues above time-series forecasts. This issue is especially important when valuing firms with little or no analyst coverage, where there is, of necessity, an increased reliance on historical revenues for forecasting purposes. We find that all three web usage metrics do have significant incremental predictive power.

Abstract:
After a string of years in which security analysts' top stock picks significantly outperformed their pans, the year 2000 was a disaster. During that year the stocks least favorably recommended by analysts earned an annualized market-adjusted return of 48.66 percent while the stocks most highly recommended fell 31.20 percent, a return difference of almost 80 percentage points. This pattern prevailed during most months of 2000, regardless of whether the market was rising or falling, and was observed for both tech and non-tech stocks. While we cannot conclude that the 2000 results are necessarily driven by an increased emphasis on investment banking by analysts, our findings should add to the debate over the usefulness of analysts' stock recommendations to investors. They should also serve to alert researchers to the possibility that excluding the year 2000 from their sample period could have a significant impact on any conclusions they draw concerning analysts' stock recommendations.

Abstract:
From January 1996 through June 2003, the average daily abnormal return to independent research firm buy recommendations exceeds that of investment bank buy recommendations by 3.1 basis points (almost 8 percentage points annualized). Investment bank buy recommendation underperformance is more pronounced following the NASDAQ market peak (March 10, 2000) and strikingly so for buy recommendations on firms that recently conducted equity offerings. In contrast, investment bank hold and sell recommendations outperform those of independent research firms by 1.8 basis points daily (4 1/2 percentage points annualized). These results suggest reluctance by investment banks to downgrade stocks whose prospects dimmed during the bear market of the early 2000s, as claimed in the SEC's Global Research Analyst Settlement.

Analyst, recommendation, investment bank, independent research, Global Research Analyst Settlement

Abstract:
This study compares the profitability of security recommendations issued by investment banks and independent research firms. During the 1996 through mid-2003 time period, the average daily abnormal return to independent research firm buy recommendations exceeds that of the investment banks by 3.1 basis points, or almost 8 percentage points annualized. In contrast, investment bank hold and sell recommendations outperform those of independent research firms by -1.8 basis points daily, or -4½ percentage points annualized. Investment bank buy recommendation underperformance is concentrated in the subperiod subsequent to the NASDAQ market peak (March 10, 2000), where it averages 6.9 basis points per day, or slightly more than 17 percent annualized. More strikingly, during this period those investment bank buy recommendations outstanding subsequent to equity offerings underperform those of independent research firms by 8.7 basis points (almost 22 percent annualized). Taken as a whole, these results suggest that at least part of the underperformance of investment bank buy recommendations is due to a reluctance to downgrade stocks whose prospects dimmed during the early 2000's bear market, as claimed in the SEC's Global Research Analyst Settlement. Additional analyses find that the underperformance of investment bank buy recommendations extends not only to the ten investment banks sanctioned in the research settlement but to the non-sanctioned investment banks as well.

Analyst, recommendation, investment bank, broker, independent research, Global Analyst Research Settlement, accounting, stock recommendation performance, independent research firms

Abstract:
This paper analyzes the distribution of stock ratings at investment banks and brokerage firms and examines whether these distributions can be used to predict the profitability of analysts' recommendations. Consistent with prior work, we find that the percentage of buy recommendations increased substantially from 1996-2000. Starting in mid-2000, however, the percentage of buys decreased steadily. Our analysis strongly suggests that this is due, at least in part, to the implementation of NASD Rule 2711, which requires brokers' ratings distributions to be made public. Notably, over our sample period the difference between the percentage of buy recommendations of the large investment banks singled out for sanction in the Global Research Analyst Settlement and that of the non-sanctioned brokers is economically quite small.

Additionally, we find that a broker's stock ratings distribution can predict the profitability of its recommendations. Upgrades to buy issued by brokers with the smallest percentage of buy recommendations significantly outperformed those of brokers with the greatest percentage of buys, by an average of 50 basis points per month. Further, downgrades to hold or sell coming from brokers issuing the most buy recommendations significantly outperformed those of brokers issuing the fewest, by an average of 46 basis points per month.

accounting, investment banks, stock ratings, profitability

Abstract:
This paper analyzes the distribution of stock ratings at investment banks and brokerage firms and examines whether these distributions can predict the profitability of analysts' recommendations. We document that the percentage of buys decreased steadily starting in mid-2000, likely due, at least in part, to the implementation of NASD Rule 2711, requiring the public dissemination of ratings distributions. Additionally, we find that a broker's ratings distribution can predict recommendation profitability. Upgrades to buy (downgrades to hold or sell) issued by brokers with the smallest percentage of buy recommendations significantly outperformed (underperformed) those of brokers with the greatest percentage of buys.

Analyst, investment bank, broker, stock ratings, recommendations, NASD 2711

Abstract:
This paper analyzes the distribution of stock ratings at investment banks and brokerage firms and examines their relation to the profitability of analysts' recommendations. Consistent with prior work, we find that the percentage of buy recommendations increased substantially from 1996-2000. Notably, though, the largest brokers, who have received the most scrutiny from regulators and the media, generally have a smaller percentage of buy recommendations than our sample as a whole. Starting in mid-2000 the percentage of buys has decreased steadily. Our analysis strongly suggests that this is due, at least in part, to the implementation of NASD Rule 2711, which requires brokers' ratings distributions to be made public. We also find that a broker's stock ratings distribution can predict the profitability of its recommendations. Upgrades to buy issued by brokers with the smallest percentage of buy recommendations significantly outperformed those of brokers with the greatest percentage of buys, by an average of 50 basis points per month. Conversely, downgrades to hold or sell coming from brokers issuing the most buy recommendations significantly outperformed those of brokers issuing the fewest, by an average of 46 basis points per month.

Analyst, investment bank, broker, stock ratings, recommendations, NASD 2711

Abstract:
This paper presents evidence of anomalies in internet firms' stock returns surrounding their quarterly earnings announcements. There is a general runup in prices in the days prior to the earnings announcements, followed by a price reversal lasting for several days. The magnitude of the market-adjusted returns associated with these price movements exceeds 11 percent over a 10-day period. We find little evidence to suggest that these returns can be explained either by the earnings news disclosed or by risk changes. Additional analyses suggest that these return patterns are driven, at least in part, by price pressure.

capital market, internet, stock returns, earnings announcement, price pressure

Abstract:
This paper presents evidence of persistent anomalies in internet firms' stock returns surrounding their quarterly earnings announcements. There is a general run-up in prices in the days prior to the earnings announcement, which extends through the market opening on the day subsequent to the release. This is followed by a price reversal lasting for several days. The magnitude of the market-adjusted returns associated with these price movements exceeds 11 percent over a 10-day period. There is little evidence to suggest that these returns can be explained either by the earnings news disclosed or by changes in risk around the earnings announcements. Additional analyses suggest that these return patterns are driven, at least in part, by price pressure which exists in the days before internet firms' earnings announcements. A trading strategy designed to exploit these price patterns would have generated a daily return of more than 1 percent over the sample period.

Abstract:
This paper tests for the existence of performance persistence in brokerage house stock recommendations. For the period 1987-1996 we show that purchasing the current-year buy recommendations of the brokerage houses with the best prior performance earned an annualized geometric mean raw return of 18.6 percent, while purchasing the recommended stocks of the houses with the worst prior performance earned only 14.3 percent. After controlling for market risk, size, book-to-market, and price momentum effects, though, we find no significant difference, in general, between the abnormal returns of the best and worst brokerage houses. A series of supplementary tests confirm this result. The findings for brokerage house sell recommendations are even weaker. Overall, our tests provide no reliable evidence of performance persistence for brokerage house stock recommendations.

Abstract:
We document that stocks with the strongest prior 12-month returns experience a significant average market-adjusted return of 1.58 percent during the five trading days before their earnings announcements and a significant average market-adjusted return of 1.86 percent in the five trading days afterward. These returns remain significant even after accounting for transactions costs. We empirically test two possible explanations for these anomalous returns. The first is that unexpectedly positive news hits the market over the few days prior to these firms' earnings announcements, and that unexpectedly negative news comes out just afterwards. The second possibility is that stocks with sharp run-ups tend to attract individual investors' attention, and investment dollars, particularly before their earnings announcements. We do not find evidence for an information-based explanation; however, our analysis suggests the possibility that the trading decisions of individual investors are at least partly responsible for the return pattern we observe.

earnings announcement, anomaly, limited attention, return

Abstract:
We show that abnormal returns to analysts’ recommendations stem from both the ratings levels assigned as well as the changes in those ratings. Conditional on the ratings change, buy and strong buy recommendations have greater returns than do holds, sells, and strong sells. Conditional on the ratings level, upgrades earn the highest returns and downgrades the lowest. We also find that both ratings levels and changes predict future unexpected earnings and the associated market reaction. Our results imply that (a) investment returns may be enhanced by conditioning on both recommendation levels and changes, (b) the predictive power of analysts’ recommendations reflects, at least partially, analysts’ ability to generate valuable private information, and (c) some inconsistency exists between analysts’ ratings and the formal ratings definitions issued by securities firms.

analysts, ratings, recommendations, changes, levels, returns

Abstract:
The objective of this paper is to explore the effects of analyst bias on the voluntary disclosure decisions of corporate managers. It is shown that when a manager believes that an analyst following his firm might be exhibiting undue optimism, he will grant the analyst access to his private information not only if it is favorable, but, potentially, also if it is sufficiently unfavorable. In contrast, when the manager believes that the analyst may be exhibiting undue pessimism, he will withhold access not only when the information is unfavorable, but, possibly, also when it is sufficiently favorable. These strategies differ not only from each other, but also from the optimal strategy in a setting without analyst bias. These differences make clear that any analysis of managerial disclosure strategies must take into account the possible biases of analysts and, by extension, the nature of the information currently in the possession of investors in the marketplace. The analysis also explores the effect of changes in the economy's parameters on the probability of managerial disclosure. Some of these results again differ from those obtained in a setting without analyst bias and have the potential of generating future empirical work.

Abstract:
This paper examines the impact of soft dollar practices on market equilibrium and trading profits. The setting is one in which there exist both money managers and individual (nonclient) investors and in which soft dollar payments from brokers to money managers cannot be publicly observed. In this context it is shown that soft dollars increase the trading aggressiveness of money managers and decrease the aggressiveness of nonclient investors. Under certain conditions, the increased trading aggressiveness of the managers leads to an increase in their clients' expected profits, but to a decline in market liquidity and total trading volume. These results hold whether or not the clients adjust the money managers' fee for the expected soft dollar payments. However, if the actual amount of soft dollars paid were observable, their value to the client may disappear. The results of this paper should be of interest to the Securities and Exchange Commission, which is currently considering expanding the reporting requirements for soft dollars.

Abstract:
This paper explores implications of differential personal taxation for corporate investment and dividend decisions. The personal tax advantage of dividend deferral causes shareholders to generally prefer greater investment in real assets under internal as opposed to external financing. Furthermore, dividend deferral is shown to be costly at the corporate level, causing shareholders in different tax brackets at times to disagree over optimal investment and dividend policies under internal financing. The profitability of internally-financed security investment is shown to depend on a security's tax status and shareholders' tax brackets. However, externally-financed security purchases are unprofitable from a tax standpoint.

Dividends, Investment, Personal Taxation, Corporate Taxation, Internal Financing, External Financing, Tax Brackets, Taxes, Shareholder Conflicts of Interest

Abstract:
After a string of years in which security analysts' top stock picks significantly outperformed their pans, the years 2000 and 2001 were disasters. During those two years, the stocks least favored by analysts earned an average annualized market-adjusted return of 13.44 percent whereas the stocks most highly recommended underperformed the market by 7.06 percent, a return difference of more than 20 percentage points. This pattern prevailed during most months of 2000 and 2001 and was observed for both technology and non-technology stocks. Additional analysis suggests that these poor results were driven, at least in part, by analysts' tendency to recommend small-capitalization growth stocks during those years, despite the fall of those stocks from favor. Whether or not this preference was motivated by a desire to attract and retain the most lucrative investment banking clients, our findings should add to the debate over the usefulness of analyst stock recommendations. They should also serve to alert researchers to the possibility that excluding 2000 and 2001 from their sample periods could have a significant impact on any conclusions they draw about analyst stock recommendations.

Equity Investments: fundamental analysis and valuation models

Abstract:
An important element of a firm's disclosure strategy is the timing of its mandatory public announcements. In this paper, two aspects of disclosure timing are examined. The first is the intraday timing of earnings announcements. It is demonstrated here that, under reasonable conditions, market prices reflect better the valuation implications of an earnings announcement when it is made during trading hours rather than after the market has closed. This implies that managers should prefer to release earnings with positive (negative) implications for firm value during (after) trading hours. The second issue examined is the sequencing of multiple corporate disclosures. It is shown that if the announcements have positive (negative) implications for firm value, managers should prefer to make them separately (simultaneously), as market prices better reflect the valuation implications of multiple announcements when they are made at different times.

Abstract:
This paper shows that there is a positive relation between the number of analysts following a firm and the firm's expected share price. This relation is a direct consequence of market participants' inability to observe the number of informed traders in the market. It is further shown that a firm's manager can have an impact on analyst following by varying the precision of the private information analysts obtain about the firm. In equilibrium, the manager will choose a precision level greater than that which maximizes analyst following, but, in many cases, less than its largest possible value.

Abstract:
This paper explores the link between shareholder lawsuits brought under Rule 10b-5 of the Securities Exchange Act of 1934 and managerial disclosures of prospective information. Two scenarios are examined. In the first, the manager's information is assumed to be such that there exists an affirmative duty to disclose under Rule 10b-5. In this setting it is shown that the manager will have a tendency to disclose either good news or news that is sufficiently bad. Further, the good news disclosures are expected to be more precise than those that reflect unfavorable information. It is also demonstrated that the probability of the manager making a disclosure will increase with both the precision of his information and the variability of his firm's earnings. In the second scenario, the manager's information is such that there is no affirmative duty to disclose under Rule 10b-5. In this setting, it is predicted that the manager will withhold news that is sufficiently bad and will, in some cases, also withhold good news. Several of these predictions are consistent with documented empirical regularities.

Abstract:
This paper explores the link between shareholder lawsuits brought under Rule 10b-5 of the Securities Exchange Act of 1934 and managerial disclosures of prospective information. When the manager's information is such that there is no affirmative duty to disclose under Rule 10b-5, previous research has shown that the manager will withhold his information if it is sufficiently unfavorable and will disclose it otherwise. When the manager's information is such that there exists an affirmative duty to disclose under Rule 10b-5, it is shown here that the manager will release either good news or news that is sufficiently bad. Further, the good news disclosures are expected to be more precise than those that reflect unfavorable information. It is also demonstrated that the probability of a disclosure will increase with both the precision of the manager's information and the variability of his firm's earnings.