Examining Behavioral Aspect of Security Analysts Recommendations and Earnings Forecasts
Date Issued
2006
Date
2006
Author(s)
Wu, Ruei-Shian
DOI
en-US
Abstract
Security analysts’ recommendations and earnings forecasts convey rich information. This study investigates analysts’ ability of information processing and analyzing concerning various stock characteristics and behavioral biases. In the first parts of the thesis, we consider the puzzle: why value strategies still work when the market is dominated by sophisticated participants. In the next part, we examine: do security analysts underreact in generating recommendations for recovering stocks?
The purpose of the first part is to investigate whether analysts perform differently when processing information concerning glamour compared with value stocks. We find that analyst recommendations contribute more (less) to the selection of glamour (value) stocks. Our results consistently indicate that the glamour stocks with analyst’s favorable ratings yield significantly higher abnormal return than value stocks with all kinds of ratings after control size, book-to-market, and beta. Analyst’s better expertise in valuing glamour stocks is not only in recommendations but also in earnings forecasts. The systematic bias of analyst inferior performance of recommending and forecasting in value portfolio may be owing to analyst’s differential expertise in evaluating companies or to less accounting persistency which is proxied by earnings predictability in value stocks. Our evidence shows that the results are robust after controlling three-year earnings volatility. In short, analysts have superior expertise in analyzing glamour stocks.
In the second part, we examine whether the incorporation of new information that is inconsistent with prior analyst expectations leads analysts to delay the release of their new and changed recommendation. Our study is based on two phenomena documented in psychology: cognitive dissonance and conservatism. We posit and find that analysts may be subject to cognitive dissonance and underreact to new information when the evidence is inconsistent with one’s prior perception. Adopting stocks with reiterated unfavorable recommendations as the benchmarks, we show that analysts are more conservative and delay upgrades for the unfavorable category firms. Analyst underreaction appears to be more pronounced for the stocks been downgraded from the favorable category than those with reiterated unfavorable recommendations. Our finding shows that analyst underreaction to new information may be compounded by the conservatism resulted from previous disappointments. We further exclude the potential explanations that the delay may be driven by greater volatility of recovering stock returns and difference in analyst preference of coverage. The documented significantly longer duration for the recovering stocks is consistent with the effectiveness of contrarian investment strategies.
Subjects
分析師
股票推薦
盈餘預測
預測修正
價值股
明星股
期間間距
保守主義
認知失調
反應不足
Analyst
Stock Recommendation
Earnings Forecast
Earnings Revision
Value Stock
Glamour Stock
Duration
Conservatism
Cognitive Dissonance
Underreaction
Type
thesis
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