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http://ssrn.com/abstract=1478451
 
 

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It's the Earnings, Stupid! Analysts' Implicit Valuation Models and Their Recommendation Accuracy


Ambrus Kecskes


York University - Schulich School of Business

Roni Michaely


Cornell University - Samuel Curtis Johnson Graduate School of Management; Interdisciplinary Center (IDC)

Kent L. Womack


University of Toronto - Rotman School of Management

July 31, 2013

Tuck School of Business Working Paper No. 2009-67
Johnson School Research Paper Series No. #40-09

Abstract:     
A sell-side analyst changes his stock recommendation when his valuation of the firm differs from the market's current valuation. Such differences in valuation arise from different estimates of the stock’s earnings, and/or its discount rate relative to those of the market-setting consensus. Our main finding is that recommendation changes that are based on changes in earnings forecasts are more accurate and valuable to investors, possibly because they are less subject to analysts' cognitive and incentive biases. A simple trading strategy based on earnings-based-recommendation-changes earns average risk-adjusted returns of over 3% per month in the period 1994-2010.

Number of Pages in PDF File: 58

Keywords: analysts, brokers, recommendations, earnings, growth rates, discount rates, information, market efficiency

JEL Classification: G14, G24

working papers series


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Date posted: September 26, 2009 ; Last revised: September 3, 2013

Suggested Citation

Kecskes, Ambrus and Michaely, Roni and Womack, Kent L., It's the Earnings, Stupid! Analysts' Implicit Valuation Models and Their Recommendation Accuracy (July 31, 2013). Tuck School of Business Working Paper No. 2009-67; Johnson School Research Paper Series No. #40-09. Available at SSRN: http://ssrn.com/abstract=1478451 or http://dx.doi.org/10.2139/ssrn.1478451

Contact Information

Ambrus Kecskes
York University - Schulich School of Business ( email )
4700 Keele Street
Toronto, Ontario M3J 1P3
Canada
Roni Michaely (Contact Author)
Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )
431 Sage Hall
Ithaca, NY 14853
United States
607-255-7209 (Phone)
607-254-4590 (Fax)
HOME PAGE: http://www.johnson.cornell.edu/faculty/profiles/Michaely/
Interdisciplinary Center (IDC)
P.O. Box 167
Herzliya, 46150
Israel
Kent L. Womack
University of Toronto - Rotman School of Management ( email )
105 St. George Street
Toronto, Ontario M5S 3E6
Canada

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