Do Financial Analysts’ Long-Term Growth Forecasts Matter? Evidence from Stock Recommendations and Career Outcomes

49 Pages Posted: 16 Sep 2011 Last revised: 19 Mar 2015

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: September 14, 2011

Abstract

Prior literature refers to economic incentives to generate investment banking business and trading commissions as explanations for analyst publication of forecasts of firms’ long-term earnings growth (LTG). Prior research also documents wildly optimistic LTG forecasts and a negative relation between LTG forecasts and subsequent excess returns. Thus, the literature portrays analysts’ LTG forecasts as nonsensical from a valuation perspective. We introduce and investigate a new perspective on the value-relevance of analyst publication of LTG forecasts. We hypothesize that analysts issuing LTG forecasts signal relatively high effort and ability in developing perspective of the subject firms’ long-term prospects. Consistent with this hypothesis, we find that the stock market responds more strongly to the stock recommendation revisions of analysts who publish accompanying LTG forecasts. In addition, we hypothesize and find that analysts issuing LTG forecasts are less likely to leave the profession or move to smaller brokerage houses. Consistent with Reg. FD’s intention to restrict analyst access to insider information and promote fundamental analysis of the valuation implications of firms’ long-term prospects, we find that post-Reg. FD observations drive most of our results. Overall, we identify previously undocumented benefits accruing to analysts who publish LTG forecasts.

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 Financial Analysts’ Long-Term Growth Forecasts Matter? Evidence from Stock Recommendations and Career Outcomes (September 14, 2011). Journal of Accounting & Economics (JAE), Vol. 51, No. 1-2, 2012. Available at SSRN: https://ssrn.com/abstract=1927606 or http://dx.doi.org/10.2139/ssrn.1927606

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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