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Analysts

Paper Session

Friday, Jan. 6, 2017 1:00 PM – 3:00 PM

Sheraton Grand Chicago, Sheraton Ballroom III
Hosted By: American Finance Association
  • Chair: Ing-Haw Cheng, Dartmouth College

Analyst Effort Allocation and Firms’ Information Environment

Jarrad Harford
,
University of Washington
Feng Jiang
,
State University of New York-Buffalo State
Rong Wang
,
Singapore Management University
Fei Xie
,
University of Delaware

Abstract

We examine how sell-side analysts allocate their effort among firms in their research portfolios and the consequences of their effort allocation decisions. We show that analysts play favorites among portfolio firms by devoting more effort to firms that are relatively more important for their career concerns. Specifically, controlling for analyst and firm characteristics, we find that within each analyst’s portfolio, firms ranked relatively higher based on market capitalization, trading volume, or institutional ownership receive more accurate, frequent, and informative earnings forecast revisions and stock recommendation changes that contain greater information content. As a result, even with explicit controls for firm characteristics, firms whose relative rank based on these dimensions is high in more analysts’ portfolios display less information asymmetry and have higher stock market liquidity and lower costs of capital. Moreover, we find that analysts who engage in a greater extent of career concerns-driven effort allocation are more likely to experience favorable career outcomes.

The Job Rating Game: The Effects of Revolving Doors on Analyst Incentives

Elisabeth Kempf
,
Tilburg University

Abstract

Investment banks frequently hire credit analysts from rating agencies. A widely held view is that this "revolving door" undermines analysts' incentives to issue accurate ratings. Using a hand-collected dataset of the performance and career paths of 245 credit rating analysts between 2000 and 2009, I show that the ratings by analysts who eventually move to investment banks are on average more accurate than the ratings by other analysts who rate similar securities at the same point in time. A notable exception is the small fraction of securities underwritten by their future employers, where revolving analysts do not outperform. Overall, my findings suggest that the revolving door may, on average, strengthen rather than distort analysts' incentives to issue accurate ratings.

Speed and Expertise in Stock Picking: Older, Slower, and Wiser?

Romain Boulland
,
ESSEC Business School
Chayawat Ornthanalai
,
University of Toronto
Kent Womack
,
University of Toronto

Abstract

We document significant differences among sell-side security analysts in how frequently they change their minds in making stock recommendations and find that this characteristic strongly predicts their recommendations’ value. Analysts who revise their decisions more slowly make more influential recommendations and generate better portfolio returns than those who do not. We find that slower-revising analysts issue more timely recommendation changes and are less likely to herd on the consensus. Their decision speed-style is associated with positive career outcomes; they are more likely to attain the prestigious All-star status and have career longevity. Further, we find a strong tendency for analysts to change their recommendations more slowly throughout their career. While analysts’ decision-speed style and their career tenure correlate, the former is the only characteristic that robustly predicts their recommendations’ value. We link our findings to the role that reputation and experience play in individual decision making and support the notion that a deliberate, slower-decision style trumps a “beat the crowd” mentality.
Discussant(s)
Devin Shanthikumar
,
University of California-Irvine
Joel Shapiro
,
University of Oxford
Lily Fang
,
INSEAD
JEL Classifications
  • G1 - Asset Markets and Pricing