Does Analyst Optimism About Future Earnings Distort Stock Prices?

This study investigates “the information content of dividends hypothesis” using data on UK firms from 1990-2015. Dividends act as an important conveyor of information. Dividend changes may trigger changes in stock prices because they may convey new information about the firm’s future earnings and profitability. Why do companies pay dividends (or analogously why are stockholders interested in receiving dividends), given that it is well known that dividends are often taxed heavily? This question is of special interest in the UK, where the dividend tax is higher than the capital gain tax. Previous research has used a number of dividend policy theories to explain the dividend policy puzzle. We carry out several estimations and find out that contrary to some other studies, there is no evidence that dividend increases (decreases) provide information about the future profitability or earnings of UK firms.

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Short Sellers and the Informativeness of Stock Prices with Respect to Future Earnings

SSRN Electronic Journal ◽

10.2139/ssrn.2085019 ◽

2012 ◽

Cited By ~ 1

Author(s):

Michael S. Drake ◽

James N. Myers ◽

Linda A. Myers ◽

Michael D. Stuart

Keyword(s):

Stock Prices ◽

Future Earnings ◽

Short Sellers

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The Persistence, Forecasting, and Valuation Implications of the Tax Change Component of Earnings

The Accounting Review ◽

10.2308/accr.2006.81.3.589 ◽

2006 ◽

Vol 81 (3) ◽

pp. 589-616 ◽

Cited By ~ 70

Author(s):

Andrew P. Schmidt

Keyword(s):

Stock Prices ◽

Tax Rates ◽

Effective Tax Rates ◽

Future Earnings ◽

Reporting Requirements ◽

Prior Literature ◽

Change Components

I examine whether earnings generated by changes in effective tax rates (the tax change component) persist and aid in forecasting future earnings. In addition, this study investigates to what extent investors incorporate the forecasting implications of the tax change component of earnings into stock prices. I find that there is a positive, significant association between the tax change component of earnings and future earnings. I use the interim reporting requirements of APB No. 28 (APB 1973) and FASB Interpretation No. 18 (FASB 1977) to further decompose the tax change component into an initial and a revised portion based on the first quarter estimate of the annual effective tax rates (ETR). I find that the initial tax change component is more persistent for future earnings than the revised tax change component. These results are consistent with my hypotheses that the initial and revised tax change components have differential persistence and forecasting implications, and dispute the broad notion advanced by prior literature that ETR-related earnings changes are transitory. Results from market tests indicate that the market underweights the forecasting implications of the tax change component and the mispricing appears to be driven by the transitory nature of the revised tax change component.

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The Influence of Analysts, Institutional Investors, and Insiders on the Incorporation of Market, Industry, and Firm-Specific Information into Stock Prices

The Accounting Review ◽

10.2308/accr.2004.79.4.1119 ◽

2004 ◽

Vol 79 (4) ◽

pp. 1119-1151 ◽

Cited By ~ 521

Author(s):

Joseph D. Piotroski ◽

Darren T. Roulstone

Keyword(s):

Institutional Investors ◽

Stock Prices ◽

Stock Return ◽

Relevant Information ◽

Specific Information ◽

Specific Component ◽

Future Earnings ◽

Industry Level ◽

Level Information ◽

Information Advantage

We investigate the extent to which the trading and trade-generating activities of three informed market participants—financial analysts, institutional investors, and insiders—influence the relative amount of firm-specific, industry-level, and market-level information impounded into stock prices, as measured by stock return synchronicity. We find that stock return synchronicity is positively associated with analyst forecasting activities, consistent with analysts increasing the amount of industry-level information in prices through intra-industry information transfers. In contrast, stock return synchronicity is inversely related to insider trades, consistent with these transactions conveying firm-specific information. Supplemental tests show that insider and institutional trading accelerate the incorporation of the firm-specific component of future earnings news into prices alone, while analyst forecasting activity accelerates both the industry and firm-specific component of future earnings news. Our results suggest that all three parties influence the firm's information environment, but the type of price-relevant information conveyed by their activities depends on each party's relative information advantage.

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