Information Content of Equity Analyst Reports

Abstract

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...

Analyst Report Readability

“…Several relatively more recent studies have examined the informativeness of analyst reports. For example, Kothari, Li Asquith et al (2005) tested their specific information components (contents). In contrast to these studies, which focus on what information is communicated, this paper studies analyst reports from a different angle, using different tools, and focuses on how the information is communicated (i.e.…”

“…Asquith et al (2005) This is the Pre-Published Version suggested that analyst reports provide useful information to investors whereas Li (2008) provided empirical evidence of the importance of readability of annual reports, and posited that studying the readability of analyst reports allows us to understand analyst reports from a different angle. Li et al (2011) further extend the studies on financial reports' readability by studying the association between readability of 10K filings and analyst behaviors.…”

“…Asquith, Mikhail and Au (2005) suggested that disclosure of research logic and reasoning behind an analyst report is critical for investors to better understand firm value. One important feature of analyst reports that reflects value relevant information, as well as incentives of authors, is readability.…”

Purchase Price Allocations: Do They Matter?

“…• %ܶܲ i is the percentage of the target prices hit by the actual security prices over the next 12 month (Asquith et al (2005)). …”

Returns to buying upward revision and selling downward revision stocks

“…It is believed that analysts have better knowledge of a firm's fundamental information and that this knowledge therefore reduces the information asymmetry between firms and investors. Studies have pointed out that analysts' earnings forecasts provide investors with valuable information, for example, Asquith et al (2005) found that analysts' reports provide new information and that the market reacts to earnings forecast revisions, recommendation revisions, and price target revisions. Franket et al (2006) also find bad news forecast revisions have a greater impact on price than positive forecast revisions.…”