41 Pages Posted: 8 Sep 2008 Last revised: 17 Sep 2008
Date Written: September 16, 2008
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.
Keywords: Analysts, stock recommendations, earnings forecasts, residual income models, valuation, regulation, Reg FD
JEL Classification: G30, G18, G38, K2, M41
Suggested Citation: 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: https://ssrn.com/abstract=1264731 or http://dx.doi.org/10.2139/ssrn.1264731
By John Graham