Analyzing the Analysts: Career Concerns and Biased Earnings Forecasts

Hong, Harrison; Kubik, Jeffrey D.

doi:10.1111/1540-6261.00526

Cited by 1,212 publications

(883 citation statements)

References 49 publications

(47 reference statements)

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“…This literature has two aims: to verify whether there is herding in financial markets, and, if yes, to investigate the reasons for herd behavior. In particular, various authors have investigated whether, due to career concerns, there is reputational herding by investment newsletters (see, e.g., Graham [1999]), macroeconomic forecasters (see, e.g., Lamont [2002], Ehrbeck and Waldmann [1996]), security analysts (see, e.g., Hong and Kubik [2003], Hong, Kubik and Solomon [2000], Welch [2000]), mutual fund managers (see, e.g., Massa and Patgiri [2007], Chevalier and Ellison [1999]), or institutional investors (see, e.g., Sias [2004]). In summary, these papers only provide mixed evidence for the presence of reputational herding in financial markets.…”

Section: Empirical Literature On Herd Behavior In Financial Marketsmentioning

confidence: 99%

Reputational Herding in Financial Markets: A Laboratory Experiment

Roider

Voskort

2016

Journal of Behavioral Finance

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We study reputational herding in financial markets in a laboratory experiment. In the spirit of Dasgupta and Prat [2008], career concerns are introduced in a sequential asset market where wages for investors are set by subjects in the role of employers. Employers can observe investment behavior, but not investors' ability types. Thereby, reputational incentives may arise endogenously. We find that a sizable fraction of investors follows an established trend even in a setting where there are no reputational incentives. In a setting where there are reputational concerns, they do not seem to create substantial herd behavior.

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Section: Empirical Literature On Herd Behavior In Financial Marketsmentioning

confidence: 99%

Reputational Herding in Financial Markets: A Laboratory Experiment

Roider

Voskort

2016

Journal of Behavioral Finance

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“…In working for their principals (investors), financial advisors face incentive problems and reputation concerns, which may end up distorting their investment recommendations (e.g., Lin and McNichols (1998) and Hong and Kubik (2003)). Smart investors recognize such distortion and can discount the recommendations to de-bias the transmitted information.…”

Section: Distorted Information Transmissionmentioning

confidence: 99%

Bubbles, Crises, and Heterogeneous Beliefs

Xiong

2013

Handbook on Systemic Risk

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This paper reviews the quickly growing literature that builds on heterogeneous beliefs, a widely observed attribute of individuals, to explain bubbles, crises, and endogenous risk in financial markets.Wei Xiong Princeton University Department of Economics Bendheim Center for Finance Princeton, NJ 08450 and NBER wxiong@princeton.edu 1The history of financial markets has been dotted with episodes of bubbles, during which market values of assets vastly exceeded reasonable assessments of their fundamental value. Asset price bubbles can lead to severe economic consequences ranging from wasteful over-investment and frenzied trading during booms to devastating financial crises and depressed real economies during busts. Economists have emphasized many aspects of bubbles and crises. Minsky (1974) advocated the view that excessive expansion of bank credit due to optimism can fuel a speculative euphoria and slowly lead the economy to a crisis. Kindleberger (1978) stressed that irrationally optimistic expectations frequently emerge among investors in the late stages of major economic booms and lead firm managers to over-invest, over-promise, and over-leverage, which sow the seeds for an eventual collapse after they fail to deliver on their promises.Shiller (2000) highlighted a host of psychological biases people use in forming a feedback mechanism, through which initial price increases caused by certain initial precipitating factors such as new technology innovations feed back into even higher asset prices through increased investor confidence and expectations. Allen and Gale (2007) focused on agency problems of professional managers who actively seek unwarranted risk, which leads to bubbles and crises.This chapter reviews a quickly growing body of work that was started by Harrison and Kreps (1978) that studies bubbles and crises based on heterogeneous beliefs, a widely observed attribute of individuals.In a market in which agents disagree about an asset's fundamental and short sales are constrained, an asset owner is willing to pay a price higher than his own expectation of the asset's fundamental because he expects to resell the asset to a future optimist at an even higher price. Such speculative behavior leads to a bubble component in asset prices. This approach does not require a substantial amount of aggregate belief distortions to generate a significant price bubble. Instead, the bubble component builds on the fluctuations of investors' heterogeneous beliefs. Even when investors' aggregate beliefs are unbiased, intensive fluctuations of their heterogeneous beliefs can lead to a significant price bubble through frenzied trading (e.g., Scheinkman and Xiong (2003)). This approach is flexible enough to incorporate several important aspects of bubbles and crises, such as over-investment (e.g., Bolton, ) and crashes (e.g., Abreu and Brunnermeier (2003) and Hong and Stein (2003)). Heterogeneous beliefs can also lead to credit cycles (e.g., Geanakoplos (2010)). The speculation induced by heterogeneous beliefs also lea...

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“…Security analysts are important information intermediaries who facilitate communication between investors and managements (Healy and Palepu, 2001). Prior studies suggest that analysts' career outcomes are linked to the quality of their forecasting work, assessed by ex-post verification of forecast accuracies (Mikhail, Walther and Willis, 1999;Clement and Tse, 2003;Hong and Kubik, 2003). Analyst reports contain vital information and the reasoning behind forecast revisions.…”

Section: Introductionmentioning

confidence: 99%

Analyst Report Readability

Hsieh

Hui

2011

SSRN Journal

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This paper studies three research questions regarding analyst forecast reports' readability: (1) whether readability of analyst reports affects investment decisions; (2) whether the way analysts explain the reasoning of their research (i.e. how they tell their story) relates to accuracy of earnings forecasts; and (3) whether readability of analyst reports relates to the underlying characteristics of the analysts. We find that the market reacts more favorably to reports that revise earnings forecasts upward and are easier to read. Consistent with this finding, upward revisions have smaller forecast errors in relatively more readable reports. We also find that security analysts with longer experience, who follow more firms, tend to issue more readable reports. Upward revisions issued by analysts from smaller brokerage houses and analysts having better records of forecast accuracy are more readable. Reports are also more readable when they are issued immediately after firms' public disclosures or management forecasts. Overall, readability complements the information of reports containing upward revisions, and indicates better forecast accuracy. This is the Pre-Published Version 3

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Analyzing the Analysts: Career Concerns and Biased Earnings Forecasts

Cited by 1,212 publications

References 49 publications

Reputational Herding in Financial Markets: A Laboratory Experiment

Reputational Herding in Financial Markets: A Laboratory Experiment

Bubbles, Crises, and Heterogeneous Beliefs

Analyst Report Readability

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