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Abstract:
We catalog the complete contents of All-American Analyst reports and examine the market reaction to their release. Including the justifications supporting an analyst's opinion reduces, and in some models eliminates, the significance of earnings forecasts and recommendation revisions. Analysts both provide new information and interpret previously released information. The information in a report is most important for downgrades; target prices and the analyst's justifications are the only significant elements for reiterations. No correlation exists between valuation methodology and either analyst accuracy or the market's reaction to a report. Our adjusted R2s are much larger than those of studies using only summary measures.

Stock recommendations, Price targets, Earnings forecasts, Security analysts

Abstract:
This paper catalogs the complete text of a large sample of All-American Analyst reports and examines the market reaction to the information released. It shows that the text of the report, which provides the justifications supporting an analyst's summary opinion, provides information beyond that contained in earnings forecasts, recommendation levels, and price targets. Including the strength of the analyst's justifications, reduces, and in some models eliminates, the significance of the information available in earnings forecasts and recommendation revisions. By controlling for the simultaneous release of other information, we show that analyst reports do not merely repeat firm releases of information, but also provide both new information and/or interpretation of previously released information to the market. By examining whether the market's reaction differs by report type (i.e. upgrade, reiteration, or downgrade), we demonstrate that information in a report is most important for downgrades and that target prices and the strength of the justifications are the only elements that matter for reiterations. Finally, we find no correlation between the valuation methodology used by analysts and either the market's reaction to a report's release or the analyst's accuracy. Our adjusted R2 of nearly 26% is three or four times larger than that of other studies using only partial content from analyst reports.

Stock recommendations, price targets, earnings forecasts, security analysts

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:
This study investigates whether the form of ownership in the life insurance industry (i.e., public, private or mutual) affects the pursuit of capital, earnings, and tax management goals between 1975 and 1991. Results indicate that differences resulting from ownership structure are most pronounced in the area of tax planning. Private stock companies use both policy reserves and reinsurance to manage taxes while public companies, on average, do not appear to manage taxes. I investigate whether the tax planning differences observed appear to be induced by compensation schemes used to control agency costs in public firms, or concerns with stock market interpretations, by studying the tax planning behavior of mutual firms. These firms have diffuse ownership structures, similar to those of public companies, and thus face similar agency problems. But since mutual firms are owned by their policyholders, they are not subject to the stock market concerns that affect public companies. If both private stock and mutual firms manage taxes more aggressively than public companies, the inference is that stock market concerns create the behavioral differences. However, if only private stock companies are aggressive tax managers, differences are more likely to stem from agency costs. My results indicate that mutual firms, like public companies, do not, on average, manage taxes. This outcome is consistent with incentive compensation contracts, designed to control agency costs, at least partly inducing differences in tax management behavior between private and public stock companies.

I find support for capital management in all ownership structures. However, the specific tools employed vary across firm type. Private stock companies are more likely to manage capital through adjusting dividends while public companies and mutual firms are more likely to vary reinsurance levels. Mutual firms also used realized gains and losses to manage capital. All firm types appear to use policy reserves and reinsurance to smooth earnings.

Abstract:
This paper investigates the market reaction to the information released in security analyst reports. It shows that the market reacts significantly and positively to changes in recommendation levels, earnings forecasts, and price targets. While changes in price targets and earnings forecasts both provide information to the market, revisions in price targets have a larger and more significant impact than comparable revisions in earnings forecasts. The text of the report is also a significant source of information as it provides the justifications supporting an analyst's summary opinion. When all of this information is considered simultaneously, some of it, notably the earnings forecasts, is subsumed. The results further show that analysts correctly predict price targets slightly over 50% of the time. Finally, the valuation methodology used does not seem to be correlated with either the market's reaction or the analyst's accuracy.

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:
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.