Are Analysts Whose Forecast Revisions Correlate Less with Prior Stock Price Changes Better Information Producers and Monitors?
Nanyang Technological University (NTU)
Yen H. Tong
Nanyang Technological University (NTU) - Nanyang Business School
January 10, 2010
Finance and Corporate Governance Conference 2010 Paper
We propose an ex ante measure of analyst quality (PPI) based on the correlations between their forecast revisions and prior stock price changes. We hypothesize that analysts with lower correlations (higher PPI) are better information producers and external monitors of managerial behavior. We find that the stock price impacts of forecast revisions issued by higher PPI analysts are larger than those issued by lower PPI analysts. We also find that firms' investment sensitivity to stock prices is higher and that boards of directors rely more on analysts’ forecast errors in their CEO turnover decisions when firms are followed by more analysts with higher PPI. These results are consistent with the hypothesis that higher PPI analysts are better information producers since they provide greater information value not only to investors, but also to managers and boards of directors. We also find that firms covered by more analysts with higher PPI exhibit lower accrual discretion and are less likely to restate earnings. As earning restatements are generally associated with adverse effects on a firm’s value, we provide unambiguous evidence that analysts with higher PPI not only are good information producers, but also play an effective role in the monitoring of opportunistic managerial behavior. In sharp contrast, we find that firms covered by star analysts are more likely to engage in opportunistic earnings management and restate their earnings, suggesting that star analysts are not effective as monitors of managerial behavior.
Number of Pages in PDF File: 55
Keywords: Analysts, Earnings forecasts, Analyst ability, Analysts' private information, Investment sensitivity, Earnings management
JEL Classification: G24, G29, M41
Date posted: January 11, 2010 ; Last revised: June 1, 2012