Are Analysts Whose Forecast Revisions Correlate Less with Prior Stock Price Changes Better Information Producers and Monitors?

54 Pages Posted: 15 Mar 2011 Last revised: 4 Oct 2011

See all articles by Chuan-Yang Hwang

Chuan-Yang Hwang

Nanyang Technological University (NTU)

Yuan Li

University of Cambridge - Judge Business School; University of Cambridge - Cambridge Endowment for Research in Finance (CERF)

Yen H. Tong

Nanyang Technological University (NTU) - Nanyang Business School

Date Written: March 13, 2011

Abstract

We propose an ex ante measure of analysts’ production of private information (PPI) based on the correlations between analysts’ forecast revisions and prior stock price changes. We validate this measure by examining whether analysts with lower correlations (higher PPI) provide more information value to various stakeholders and monitor managerial behavior more effectively. We find that the stock price impacts of forecast revisions issued by analysts with higher PPI are larger than those issued by analysts with lower PPI. 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 analysts with higher PPI. In addition, we find that firms followed by analysts with higher PPI exhibit lower accrual discretion and are less likely to restate earnings. Overall, our findings suggest PPI captures analysts’ ability to produce private information and that analysts with higher PPI are better information producers and monitors.

Keywords: Analysts, Earnings forecasts, Analyst ability, Analysts' private information, Investment sensitivity, Earnings management

JEL Classification: G24, G29, M41

Suggested Citation

Hwang, Chuan-Yang and Li, Yuan and Tong, Yen H., Are Analysts Whose Forecast Revisions Correlate Less with Prior Stock Price Changes Better Information Producers and Monitors? (March 13, 2011). AFA 2012 Chicago Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1785102 or http://dx.doi.org/10.2139/ssrn.1785102

Chuan-Yang Hwang

Nanyang Technological University (NTU) ( email )

Singapore, 639798
Singapore
65-67905003 (Phone)
65-6791-3697 (Fax)

Yuan Li (Contact Author)

University of Cambridge - Judge Business School ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom

University of Cambridge - Cambridge Endowment for Research in Finance (CERF) ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom

Yen H. Tong

Nanyang Technological University (NTU) - Nanyang Business School ( email )

Singapore 639798
Singapore
65-6790-5743 (Phone)

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