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

Accounting Review, Forthcoming

Posted: 3 Oct 2008

See all articles by Ran Barniv

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

Multiple version iconThere are 2 versions of this paper

Date Written: 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.

Keywords: Stock recommendations, residual income valuations, valuation heuristics, future returns, regulations

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

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). Accounting Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1276866

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 M5S1S4
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 ( 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)

Here is the Coronavirus
related research on SSRN

Paper statistics

Abstract Views
1,281
PlumX Metrics