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http://ssrn.com/abstract=1264731
 
 

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Do Analysts Practice What They Preach and Should Investors Listen? Effects of Recent Regulations


Ran Barniv


Kent State University - Department of Accounting

Ole-Kristian Hope


University of Toronto - Rotman School of Management

Mark Myring


Ball State University - Department of Accounting

Wayne B. Thomas


University of Oklahoma - Michael F. Price College of Business

September 16, 2008


Abstract:     
From 1994 to 1998, Bradshaw (2004) finds that analysts' stock recommendations relate negatively to residual income valuation estimates but positively to valuation heuristics based on the price-to-earnings-to-growth ratio and long-term growth. These results are surprising, especially considering that future returns relate positively to residual income valuation estimates and negatively to heuristics. Using a large sample of analysts for the 1993-2005 period, we consider whether recent regulatory reforms affect this apparent inconsistent analyst behavior. Consistent with the intent of these reforms, we find that the negative relation between analysts' stock recommendations and residual income valuations is diminishing following regulations. We also show that residual income valuations, developed using analysts' earnings forecasts, relate more positively with future returns. However, we document that stock recommendations continue to relate negatively with future returns. We conclude that recent regulations have affected analysts' outputs - forecasted earnings and stock recommendations - but investors should be aware that factors other than identifying mispriced stocks continue to influence how analysts recommend stocks.

Number of Pages in PDF File: 41

Keywords: Analysts, stock recommendations, earnings forecasts, residual income models, valuation, regulation, Reg FD

JEL Classification: G30, G18, G38, K2, M41

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Date posted: September 8, 2008 ; Last revised: September 17, 2008

Suggested Citation

Barniv, Ran and Hope, Ole-Kristian and Myring, Mark and Thomas, Wayne B., Do Analysts Practice What They Preach and Should Investors Listen? Effects of Recent Regulations (September 16, 2008). Available at SSRN: http://ssrn.com/abstract=1264731 or http://dx.doi.org/10.2139/ssrn.1264731

Contact Information

Ran Barniv
Kent State University - Department of Accounting ( email )
P.O. Box 5190
Kent, OH 44242-0001
United States
330-672-1112 (Phone)
330-672-2548 (Fax)
Ole-Kristian Hope (Contact Author)
University of Toronto - Rotman School of Management ( email )
105 St. George Street
Toronto, Ontario M5S 3E6
Canada
HOME PAGE: http://www.rotman.utoronto.ca/FacultyAndResearch/Faculty/FacultyBios/Hope.aspx
Mark Myring
Ball State University - Department of Accounting ( email )
2000 W. University Ave.
Muncie, IN 47306
United States
Wayne B. Thomas
University of Oklahoma - Michael F. Price College of Business ( email )
Michael F. Price College of Business,
307 W Brooks, Rm 212B
Norman, OK 73019
United States
405-325-5789 (Phone)
405-325-7348 (Fax)
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