Do Analysts’ Long-Term Growth Forecasts Signal Effective Effort Underlying Informative Stock Recommendations and Favorable Career Outcomes?

60 Pages Posted: 9 Jul 2010

See all articles by Boochun Jung

Boochun Jung

University of Hawaii - School of Accountancy

Philip B. Shane

College of William & Mary; Monash University; Monash University - Department of Accounting

Yanhua Sunny Sunny Yang

University of Connecticut - School of Business; University of Connecticut - School of Business

Date Written: July 8, 2010

Abstract

Prior literature finds that economic incentives related to generating investment banking business and trading commissions provide the most dominant explanation for variation in analysts’ forecasts of firms’ long-term earnings growth (LTG). Prior research evidence also indicates that relying on LTG forecasts leads to negative excess returns in subsequent periods. However, the literature also documents that analysts’ LTG forecasts explain variation in their own stock recommendations. These results beg the question as to why analysts issue and use LTG forecasts that apparently fail to enhance the value-relevance of their stock recommendations. This paper addresses that question by examining whether the issuance of LTG forecasts reflects analyst effort that does, indeed, enhance the value-relevance of their stock recommendations. We show that analysts who publish LTG forecasts provide the market with more timely stock recommendations. We also find that the stock market responds more strongly to stock recommendations and recommendation revisions accompanied by LTG forecasts issued by the same analysts. Further tests show that post- Regulation Fair Disclosure (Reg. FD) observations drive our results. Finally, we investigate the effect of LTG forecast issuance on analyst career outcomes and find evidence suggesting that analysts issuing LTG forecasts are less likely to leave the profession or move to smaller brokerage houses, particularly after Reg. FD. Overall, our results suggest that publication of LTG forecasts signals effective effort increasing the value-relevance of analysts’ recommendations and providing more job security.

Keywords: long-term earnings growth forecast, stock recommendations, career outcomes

JEL Classification: M41

Suggested Citation

Jung, Boochun and Shane, Philip B. and Yang, Yanhua Sunny, Do Analysts’ Long-Term Growth Forecasts Signal Effective Effort Underlying Informative Stock Recommendations and Favorable Career Outcomes? (July 8, 2010). Available at SSRN: https://ssrn.com/abstract=1636384 or http://dx.doi.org/10.2139/ssrn.1636384

Boochun Jung

University of Hawaii - School of Accountancy ( email )

College of Business Administration
Honolulu, HI 96822
United States

Philip B. Shane

College of William & Mary ( email )

P.O. Box 8795
Williamsburg, VA 23185
United States

Monash University ( email )

23 Innovation Walk
Wellington Road
Clayton, Victoria 3800
Australia

Monash University - Department of Accounting ( email )

H3.43, Building H, Level 3
Monash University Caulfiled
Melbourne, VIC 3145
Australia

Yanhua Sunny Yang (Contact Author)

University of Connecticut - School of Business ( email )

2100 Hillside Road
Storrs, CT 06269-1041
United States
8604864696 (Phone)
8604864838 (Fax)

HOME PAGE: http://www.business.uconn.edu/person/yanhua-sunny-yang/

University of Connecticut - School of Business ( email )

2100 Hillside Rd, Unti 1041A
Storrs, CT 06238
United States
8604864696 (Phone)

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