Does Coverage by Long-term Growth Forecasting Analysts Mitigate Market Underreaction to Information about Innovative Efficiency?

55 Pages Posted: 5 Oct 2016 Last revised: 6 Apr 2020

See all articles by Jeff Zeyun Chen

Jeff Zeyun Chen

Texas Christian University

Philip B. Shane

College of William & Mary - Raymond A. Mason School of Business

Liu Yang

University of Miami

Joseph Zhang

University of Memphis

Date Written: April 4, 2020

Abstract

Prior research finds that investors have difficulty pricing corporate innovation. This paper investigates the role of long-term growth forecasting financial analysts in the efficiency of stock prices and consensus sell-side analyst forecasts, with respect to information about firms’ innovative efficiency (IE). We find that, on average, like stock prices, financial analysts’ consensus earnings and target price forecasts reflect underreaction to IE-related information. We also find that evidence of analyst and investor underreaction is limited to R&D-intensive firms not followed by long-term growth forecasting analysts. We investigate two alternative perspectives on the mechanism underlying these results. The underreaction-mitigation perspective argues that long-term growth forecasting analysts cultivate increased analyst and investor attention to IE-related information and its implications for research-intensive firms’ near- and long-term prospects; thereby, mitigating underreaction in stock prices and in consensus analysts’ earnings and target price forecasts. The offsetting-bias perspective argues that optimistically biased long-term growth forecasts beget optimism in stock prices and consensus analysts’ forecasts, which, in turn, offsets investor and analyst underreaction giving the appearance of underreaction dissipation for firms followed by long-term growth forecasting analysts. Overall, the weight of the evidence from a battery of tests favors the underreaction-mitigation perspective.

Keywords: Innovation, Patents, Long-term growth, Analysts’ forecasts, Market efficiency

JEL Classification: G14, M41

Suggested Citation

Chen, Jeff Zeyun and Shane, Philip B. and Yang, Liu and Zhang, Joseph, Does Coverage by Long-term Growth Forecasting Analysts Mitigate Market Underreaction to Information about Innovative Efficiency? (April 4, 2020). Available at SSRN: https://ssrn.com/abstract=2847334 or http://dx.doi.org/10.2139/ssrn.2847334

Jeff Zeyun Chen

Texas Christian University ( email )

2900 Lubbock Ave
Fort Worth, TX 76109
United States

Philip B. Shane (Contact Author)

College of William & Mary - Raymond A. Mason School of Business ( email )

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

Liu Yang

University of Miami ( email )

Coral Gables, FL 33124
United States

Joseph Zhang

University of Memphis ( email )

FAB 200
School of Accountancy
Memphis, TN Tennessee 38152
United States

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