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Abstract:
We examine market participants' reactions to dividend changes conditional on earnings quality. We define earnings quality as the extent to which current earnings are associated with one-year, two-year, or three-year ahead operating cash flows. Controlling for the magnitude of the dividend change, the firm's information environment, the firm's investment opportunity set, the effects of dividend clienteles, and the firm's operating risk, we find that the market reacts less to dividend change announcements from firms with higher earnings quality. Similarly, controlling for the magnitude of the dividend change, the firm's information environment, and the release of other information around the dividend declaration date, we find that the magnitude of analyst forecast revisions is significantly less for firms with higher earnings quality. Overall, our results are consistent with market participants incorporating earnings quality when reacting to information in other financial disclosures.

Abstract:
We investigate if sell-side security analysts exhibit relative persistence in their stock picking ability. We find that analysts whose recommendation revisions earned the most (least) positive excess returns in the past continue to outperform (underperform) other analysts in the future. Further, we find that the market recognizes these performance differences in the five-day period surrounding the recommendation revision. This market reaction, however, is incomplete. Excess returns measured over the one and three trading months following the revision are significantly different from zero and positively associated with the analysts' prior performance. A trading strategy taking long (short) positions in recommendation upgrades (downgrades) conditional on an analyst's prior performance generates excess returns, but these returns are insufficient to cover transaction costs.

Security analysts, Stock recommendations, Persistence, Trading strategy

Abstract:
We investigate if sell-side security analysts exhibit relative persistence in their stock picking ability. We find that analysts whose recommendation revisions earned the most (least) positive excess returns in the past continue to outperform (underperform) other analysts in the future. Further, we find that the market recognizes these performance differences in the five-day period surrounding the recommendation revision. This market reaction, however, is incomplete. Excess returns measured over the one and three trading months following the revision are significantly different from zero and positively associated with the analysts' prior performance. A trading strategy taking long (short) positions in recommendation upgrades (downgrades) conditional on an analyst's prior performance generates excess returns, but these returns are insufficient to cover transaction costs.

Security analysts; Stock recommendations; Persistence; Trading strategy

Abstract:
We investigate if earnings forecast accuracy matters to analysts by examining its association with analyst turnover from one brokerage house to another. Controlling for firm- and time-period effects, forecast horizon, and industry forecasting experience, we find that an analyst is more likely to turn over if his forecast accuracy declines relative to his peers. We find no association between an analyst's probability of turnover and his absolute forecast accuracy. These results hold if we include another measure of the analyst's performance, the profitability of his stock recommendations, in our logit specifications. In fact, there is no statistical relation between the absolute or rank profitability of an analyst's stock recommendations and the probability of turnover. Our findings indicate that forecast accuracy is important to analysts.

Abstract:
We examine whether analysts more fully incorporate prior earnings and returns information in their current quarter forecasts as their experience following a firm increases. Prior research suggests that various financial anomalies are related to investors' inability to rationally process historical earnings and price information. In particular, analysts' inability to efficiently incorporate the serial correlation in earnings surprises provides at least a partial explanation for post-earnings-announcement drift. Measuring analyst firm-specific forecasting experience as the number of prior quarters for which the analyst has issued an earnings forecast for the firm, we find that analysts underreact to prior earnings information less as their experience increases. We also find that post-earnings-announcement drift associated with firms with a more experienced analyst following is less than that for firms with a less experienced analyst following. This result, in conjunction with the finding that underreaction declines as analysts gain experience, suggests that the efficiency of a firm's market price is affected by the aggregate experience level of its analyst following. Our findings also provide evidence on one potential source of the superior earnings forecasting performance of more experienced analysts, the more efficient use of prior earnings information.

Security analysts; Underreaction; Post-earnings-announcement

Abstract:
Regulators' interest in analyst reports stems from the belief that small investors are unaware of the conflicts sell-side analysts face and may, as a consequence, be misled into making suboptimal investment decisions. We examine who trades on security analyst stock recommendations by extending prior research to focus on investor-specific responses to revisions. We find that both large and small traders react to analyst reports; however, large investors appear to trade more than small traders in response to the information conveyed by the analyst's recommendation and earnings forecast revision (proxied by the magnitudes of the recommendation change and the earnings forecast revision, respectively). We also find that small investors do not fully account for the effects of analysts' incentives on the credibility of analyst reports, as captured by the type of recommendation (i.e., upgrade versus downgrade or buy versus sell). In particular, small investors not only trade more than large investors following upgrade and buy recommendations, but also trade more following upgrade and buy recommendations than they do following downgrade and hold/sell recommendations. Furthermore, we observe that, on average, small traders are net purchasers following recommendation revisions regardless of the type of the recommendation; large traders tend to be net sellers following downgrades and sells. Consequently, large traders generate statistically positive returns from their trading, while small traders generate statistically negative returns from their trading. These findings are consistent with large investors being more sophisticated processors of information, and provide some support for regulators' concerns that analysts may more easily mislead small investors.

Security analysts, Stock recommendations, Trading volume, Investor sophistication

Abstract:
Regulators' interest in analyst reports stems from the belief that small investors are unaware of the conflicts sell-side analysts face and may, as a consequence, be misled into making suboptimal investment decisions. We examine who trades on security analyst stock recommendations by extending prior research to focus on investor-specific responses to revisions. We find that both large and small traders react to analyst reports; however, large investors appear to trade more than small traders in response to the information conveyed by the analyst's recommendation and earnings forecast revision (proxied by the magnitudes of the recommendation change and the earnings forecast revision, respectively). We also find that small investors do not fully account for the effects of analysts' incentives on the credibility of analyst reports, as captured by the type of recommendation (i.e., upgrade versus downgrade or buy versus sell). In particular, small investors not only trade more than large investors following upgrade and buy recommendations, but also trade more following upgrade and buy recommendations than they do following downgrade and hold/sell recommendations. Furthermore, we observe that, on average, small traders are net purchasers following recommendation revisions regardless of the type of the recommendation; large traders tend to be net sellers following downgrades and sells. Consequently, large traders generate statistically positive returns from their trading, while small traders generate statistically negative returns from their trading. These findings are consistent with large investors being more sophisticated processors of information, and provide some support for regulators' concerns that analysts may more easily mislead small investors.

Security analysts, Stock recommendations, Trading volume, Investor sophistication

Abstract:
Controlling for other determinants of the cost of capital, we find that firms with repeated large earnings surprises experience a higher cost of equity capital. This finding holds regardless of the sign of the earnings surprises, but firms that consistently report negative surprises have relatively higher cost of equity capital. Although firms that frequently surprise the market experience a decrease in analyst following relative to no surprise firms, this reduction in monitoring cannot account for the higher cost of equity capital. Overall, these findings document that repeated earnings surprises are costly, and provide evidence that managers have incentives to avoid missing earnings targets.

Cost of Capital, Earnings Surprises, Analyst Following, Institutional Ownership

Abstract:
We investigate potential costs experienced by firms that repeatedly have large quarterly earnings surprises during a condensed period of time. Consistent with our predictions, our univariate results indicate that surprise firms have lower analyst following, lower institutional ownership, and higher earnings-price ratios than firms that do not have large earnings surprises. Our multivariate findings, controlling for potentially confounding factors, are generally consistent with the univariate results, although our conclusions regarding institutional ownership are weaker. Further, our results generally hold regardless of whether the firm has positive surprises, negative surprises, or earnings surprises of mixed sign, suggesting that negative earnings surprises do not drive the results. Assuming that the documented differences represent a cost of earnings surprises, our findings provide an explanation for managers' desire to avoid surprising the market and their willingness to voluntarily disclose earnings-related information in advance of the mandated earnings announcement.

Abstract:
Regulation FD, imposed by the Securities and Exchange Commission in October 2000, was designed to create a level playing field by prohibiting disclosure of material private information to selected market participants, such as financial analysts. Exactly what informational advantage such participants gain is unclear. If multiple "insiders" receive identical information, private information is immediately incorporated in price and each insider has zero expected profit. If, on the other hand, Regulation FD has curtailed the flow of information from firms to the investment public, private information becomes longer-lived and more valuable. Hence, with increased risk in providing immediacy to potentially informed traders, market makers will demand increased compensation by widening the adverse selection component of the bid/ask spread. To test this proposition, we identify the cost components of the bid/ask spread for a sample of NASDAQ stocks in the period surrounding the implementation of Regulation FD. After controlling for other factors affecting the market maker's spread, we find that Regulation FD has led to an increase in adverse selection costs of approximately 36 percent. We interpret our finding as Regulation FD failing to achieve one of its desired objectives.

adverse selection, Reg FD, bid/ask spread, private information

Abstract:
We examine the relation between security analysts' annual earnings forecast boldness ("bold analysts") and changes in the inferred flow of earnings-related information from managers of the forecasted firm to bold analysts. We find that unfavorably bold analysts experience an improvement in their subsequent relative forecast accuracy. Favorable forecasters, however, experience a decrease in subsequent relative forecast accuracy. Our forecast revisions tests suggest that the market recognizes the improvement in subsequent relative forecast accuracy for unfavorably bold analysts and places no additional weight on forecast revisions from favorably bold analysts.

Management communication, Earnings forecasts, Security analysts

Abstract:
We examine if analysts more fully incorporate prior earnings and returns information in their current quarter forecasts as their experience following a firm increases. We measure analyst firm-specific forecasting experience as the number of prior quarters for which the analyst has issued an earnings forecast for the firm. We find that analysts underreact to prior earnings information less as their experience increases, suggesting one reason why analysts become more accurate with experience.

underreaction, experience, earnings forecasts, security analysts

Abstract:
I examine publicly released annual earnings forecasts issued in conjunction with stock recommendations by mutual fund managers of actively managed open-end mutual funds. I find that mutual fund manager annual earnings forecasts systematically overestimate the earnings number later disclosed at the annual earnings announcement. In further analyses, I attempt to distinguish between two explanations for this forecast bias: an untruthful reporting bias (market manipulation) and a truthful cognitive bias (optimism). These explanations generate different predictions about the timing of changes in fundholdings of forecasted securities between the forecast release and annual earnings announcement dates. I interpret my findings as more consistent with an optimism explanation for mutual fund manager annual forecast bias and less consistent with a market manipulation explanation for this bias. I am, however, unable to eliminate an unobservable selection bias either in the decision of the mutual fund manager to report a forecast publicly or in the media's decision to publish that forecast as an explanation for my finding that mutual fund manager forecasts are biased.

Mutual fund managers, earnings forecasts, optimism

Abstract:
We investigate if earnings forecast accuracy matters to security analysts by examining its association with analyst turnover. Controlling for firm- and time-period effects, forecast horizon, and industry forecasting experience, we find that an analyst is more likely to turn over if his forecast accuracy is lower than his peers. We find no association between an analyst's probability of turnover and his absolute forecast accuracy. We also investigate another observable measure of the analyst's performance, the profitability of his stock recommendations. There is no statistical relation between the absolute or relative profitability of an analyst's stock recommendations and his probability of turnover. We interpret our findings as indicating that forecast accuracy is important to analysts.

Abstract:
In this paper, we examine whether sell-side security analysts generate more accurate quarterly earnings forecasts and more profitable stock recommendations as their experience with a specific firm increases. We also examine whether the market relies more on forecasts made by analysts who have more firm-specific experience. Consistent with the "Learning By Doing" model, we find that the accuracy of quarterly earnings forecasts improves with the number of prior quarters the analyst has followed the firm, controlling for both the functional form of the learning phenomenon and other factors previously shown to affect analyst forecasting performance. Moreover, we find that the market incorporates the analyst's experience level in forming expected earnings; the weight placed on the analyst forecast increases with the experience level of the analyst. Our results suggest knowledge of an analyst's experience can be used to improve the accuracy of consensus earnings forecasts.