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This paper investigates the market reaction to the information released in security analyst reports. It shows that the market reacts significantly and positively to changes in recommendation levels, earnings forecasts, and price targets. While changes in price targets and earnings forecasts both provide information to the market, revisions in price targets have a larger and more significant impact than comparable revisions in earnings forecasts. The text of the report is also a significant source of information as it provides the justifications supporting an analyst's summary opinion.When all of this information is considered simultaneously, some of it, notably the earnings forecasts, is subsumed. The results further show that analysts correctly predict price targets slightly over 50% of the time. Finally, the valuation methodology used does not seem to be correlated with either the market's reaction or the analyst's accuracy. IntroductionThis paper investigates the association between market returns and the content of security analysts' reports. In addition, it provides the first detailed catalog of the elements in a typical analyst report. An analyst's report is the culmination of a process that includes the collection, evaluation, and dissemination of information related to a firm's future performance. The majority of these reports include three key summary elements: earnings forecasts, a stock recommendation -such as buy, sell, or hold -and a price target. In addition, many reports present extensive quantitative and descriptive analysis supporting these summary elements. Using a database constructed from analyst reports issued during 1997-1999, we examine if, after controlling for changes in earnings forecasts and summary recommendations, the market's response to the release of a security analyst report varies with price target changes and other information contained in the report. Our analysis shows that changes in the summary stock recommendations, earnings forecasts, and price targets all provide independent information to the capital markets. In particular, incorporating changes in analyst price targets dramatically increases the fit of our regression results over that obtained from earnings forecast revisions and discrete recommendations alone.Adding proxies for other information in a report, such as the strength of the written arguments made to support an analyst's opinion, significantly alters our results. As expected, the stronger the justifications provided in the report, the larger the market's reaction to the report.After including this additional information in our model, our results show that although the market reaction is still correlated with changes in price targets, the significance of earnings forecast revisions decreases. Moreover, while our recommendation downgrades remain statistically negative, the significance of recommendation upgrades is eliminated. Recent reductions in the recommendation levels used by some firms (e.g., from five to three by Merrill Lynch and Goldman Sachs...

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org.. Oxford University Press is collaborating with JSTOR to digitize, preserve and extend access to The Quarterly This paper analyzes the ways in which financially distressed firms try to avoid bankruptcy through public and private debt restructurings, asset sales, mergers, and capital expenditure reductions. Our main finding is that a firm's debt structure affects the way financially distressed firms restructure. The combination of secured private debt and numerous public debt issues seems to impede out-of-court restructurings and increases the probability of a Chapter 11 filing. In addition, we find that, while asset sales are a way of avoiding Chapter 11, they are limited by industry factors: firms in distressed and highly leveraged industries are less prone to sell assets.VVhen companies are in financial distress, they try to avoid bankruptcy by restructuring their assets and liabilities. Asset sales, mergers, capital expenditure reductions, and layoffs (on the asset side), and restructurings of bank debt and public debt (on the liability side) are all common responses to distress. Absent a quick turnaround in a company's business, a failure to restructure typically results in a Chapter 11 bankruptcy filing.During the past several years there have been a number of studies that analyze these responses to financial distress. Notable contributions include Gilson [1990] on restructurings of bank claims; Gilson, John, and Lang [1990] on debt restructurings versus bankruptcy; Brown, James, and Mooradian [1993] on public debt restructurings versus bank debt restructurings; Brown, James, and Mooradian [1994] on asset sales; and Franks and Torous [1989] and Hotchkiss [1994] on the Chapter 11 process. This paper tries to put these elements together in a more comprehensive study of how firms respond to financial distress. This content downloaded from 91.229.248.162 on Tue, 10 Jun 2014 06:55:05 AM All use subject to JSTOR Terms and Conditions 626 QUARTERLY JOURNAL OF ECONOMICSThis approach also allows us to look at interactions among different kinds of restructurings. Our study is based on a sample of 102 companies that issued high-yield "junk" bonds during the 1970s and 1980s and subsequently got into financial trouble. Of these 102 companies, 76 took visible steps to restructure their companies in response to distress. We have several principal findings. 1. Bank debt restructurings. Banks respond to financial distress in a number of ways. They "loosen" financial constraints on firms by deferring principal and interest, providing new financing, and waiving covenants; they "tighten" financial constraints by accelerating principal and interest payments, reducing lines of credit, and increasin...