Measure for Measure: The Relation between Forecast Accuracy and Recommendation Profitability of Analysts

Ertimur, Yonca; Sunder, Jayanthi; Sunder, Shyam V.

doi:10.2139/ssrn.894941

Cited by 51 publications

(122 citation statements)

References 25 publications

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“…Although I make no formal predictions, as a significant amount of research documents positive (negative) abnormal returns surrounding analysts' upgrades (e.g., Womack 1996; Ertimur et al 2007;Howe et al 2009) and given the notion that individuals, on average, will not spot analysts' mispricing errors, I expect that those individuals who trade against analysts' guidance will on average earn lower returns than those individuals who trade consistently with analysts' guidance.…”

Section: Hypotheses Developmentmentioning

confidence: 94%

Individual investors and financial disclosure

Lawrence

2013

Journal of Accounting and Economics

472

278

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Using detailed data of individual investors, this dissertation investigates whether and how individuals use financial disclosure and analysts' signals. Chapter 1 shows that, on average, individuals invest more in firms with readable, concise, and transparent financial disclosures.The results indicate that these relations are less pronounced for overconfident investors, and that individual investors appear to place a greater weighting on such financial disclosure attributes relative to institutional investors. In supplementary analyses, I further examine cross-sectional variations among individuals in their use of disclosure, and find two main subgroups that do not display a preference for accessible and transparent disclosures. The first subgroup is speculative investors, whose investment strategies rely on conjecture rather than knowledge, and the second subgroup is financially literate investors, those with lower information processing costs. These findings support the notion that more accessible and transparent disclosures are used by those individuals who need them the most: i.e., the average American. Lastly, I examine whether individuals' investment performance varies with financial disclosure attributes and show that individuals' returns are, on average, increasing in firms with more accessible and transparent disclosures.iii Chapter 2 examines how individuals react to revisions in analysts' recommendations and earnings forecasts. First, the analyses show that individuals' abnormal trading activity increases by 30 percent in response to analysts' recommendation revisions and by 15 percent in response to analysts' earnings forecast revisions. Second, the analyses indicate that 47 percent of individuals trade consistently with analyst guidance and 53 percent trade contrarian to analysts' guidance, which opposes the belief that individuals are a homogenous group of investors. The contrarian behavior is most common in response to analyst downgrades (i.e., purchasing after downgrades) and is most evident among individuals with better prior performance, individuals who trade infrequently, men, and older individuals. Lastly, the study provides evidence suggesting that trading contrarian to analysts is in general hazardous to individuals' financial health. Taken together, the results indicate that individuals respond to analyst guidance and that individuals' use of analyst guidance varies significantly with respect to their personal attributes.iv ACKNOWLEDGMENTS

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Section: Hypotheses Developmentmentioning

confidence: 94%

Individual investors and financial disclosure

Lawrence

2013

Journal of Accounting and Economics

472

278

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“…Ertimur, Sunder and Sunder (2007) show that the translation of more accurate earnings forecasts into profitable recommendation returns holds only for non-conflicted analysts. In contrast, McNichols, O'Brien and Pamukcu (2006) find no evidence of lower returns for recommendations for sell-side analysts with conflicts of interest.…”

Section: Introductionmentioning

confidence: 90%

The Stock Selection and Performance of Buy-Side Analysts

et al. 2013

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Abstract:Prior research on equity analysts focuses almost exclusively on those employed by sellside investment banks and brokerage houses. Yet investment firms undertake their own buy-side research and their analysts face different stock selection and recommendation incentives than their sell-side peers. We examine the selection and performance of stocks recommended by analysts at a large investment firm relative to those of sell-side analysts from mid-1997 to 2004. We find that the buy-side firm's analysts issue less optimistic recommendations for stocks with larger market capitalizations and lower return volatility than their sell-side peers, consistent with their facing fewer conflicts of interest and having a preference for liquid stocks. Tests with no controls for these effects indicate that annualized buy-side Strong Buy/Buy recommendations underperform those for sell-side peers by 5.9% using market-adjusted returns and by 3.8% using four-factor model abnormal returns. However, these findings are driven by differences in the stocks recommended and their market capitalization. After controlling for these selection effects, we find no difference in the performance of the buy-and sell-side analysts' Strong Buy/Buy recommendations.JEL classification: M41, G14, G29

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“…Section 5 constructs the "two-tongues metric" to detect strategic dis-11 Few papers have examined recommendations and forecasts together. Two exceptions are Ertimur, Sunder, and Sunder (2007) and Loh and Mian (2006). Both show that analysts who issue more accurate forecasts also issue more profitable recommendations, supporting our hypothesis that genuinely optimistic analysts will reveal optimism in both forecasts and recommendations.…”

mentioning

confidence: 99%

Do Security Analysts Speak in Two Tongues?

Malmendier¹,

Shanthikumar²

2007

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Measure for Measure: The Relation between Forecast Accuracy and Recommendation Profitability of Analysts

Cited by 51 publications

References 25 publications

Individual investors and financial disclosure

Individual investors and financial disclosure

The Stock Selection and Performance of Buy-Side Analysts

Do Security Analysts Speak in Two Tongues?

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