Learning and Incentive: A Study on Analyst Response to Pension Underfunding

45 Pages Posted: 20 Mar 2011 Last revised: 6 Aug 2012

Xuanjuan Chen

Shanghai University of Finance and Economics

Tong Yao

University of Iowa - Henry B. Tippie College of Business

Tong Yu

University of Cincinnati

Ting Zhang

University of Dayton - School of Business Administration

Date Written: March 17, 2011

Abstract

There is a long-standing debate on whether sell-side analysts learn from their experience to improve earnings forecast skills. This study shows that incentive is an important factor for understanding the "learning by doing" effect by analysts. We examine analysts' response to a complex type of information -- corporate pension underfunding. Pension underfunding negatively impacts future earnings and analysts on average underreact to such information in their earnings forecasts. More importantly, when there is a strong incentive for analysts to deliver timely and accurate forecasts, analyst learning effectively reduces their underreaction to pension underfunding information. On the other hand, when such an incentive is absent, the analyst learning effect is not discernible in the data. Further evidence suggests that analyst learning and incentive jointly reduce stock market mispricing associated with corporate pension underfunding.

Keywords: pension funding, analyst forecasts, learning, incentive

JEL Classification: D83, G23, G20

Suggested Citation

Chen, Xuanjuan and Yao, Tong and Yu, Tong and Zhang, Ting, Learning and Incentive: A Study on Analyst Response to Pension Underfunding (March 17, 2011). Available at SSRN: https://ssrn.com/abstract=1788684 or http://dx.doi.org/10.2139/ssrn.1788684

Xuanjuan Chen

Shanghai University of Finance and Economics ( email )

777 Guoding Road
Shanghai, Shanghai 200433
China

Tong Yao

University of Iowa - Henry B. Tippie College of Business ( email )

Acquisitions
5020 Main Library
Iowa City, IA 52242-1000
United States

Tong Yu (Contact Author)

University of Cincinnati ( email )

P.O. Box 210195
Cincinnati, OH 45221-0195
United States
4019548606 (Phone)
4019548606 (Fax)

Ting Zhang

University of Dayton - School of Business Administration ( email )

300 College Park
Dayton, OH 45469
United States

Paper statistics

Downloads
146
Rank
163,955
Abstract Views
766