NASD Rule 2711 and Changes in Analysts' Independence in Making Stock Recommendations

2009 ◽  
Vol 84 (4) ◽  
pp. 1041-1071 ◽  
Author(s):  
Chih-Ying Chen ◽  
Peter F. Chen
Keyword(s):  
Stock Prices ◽  
Conflicts Of Interest ◽  
Intrinsic Value ◽  
Earnings Forecasts ◽  
Investment Banking ◽  
Stock Recommendations ◽  
Regulatory Reforms

ABSTRACT: This study provides evidence of changes in how analysts generate stock recommendations after the SEC's approval of NASD Rule 2711 in May 2002, which introduced regulatory reforms to enhance the independence of analysts' research. We investigate the relations of analysts' stock recommendations with intrinsic value estimates (based on analysts' earnings forecasts relative to the stock prices, V/P) and with investment-banking-related conflicts of interest during the 1994–2005 period. We find a stronger relation between analysts' stock recommendations and V/P and a weaker relation between analysts' stock recommendations and conflicts of interest in the post-Rule period than prior to the implementation of the Rule. Moreover, the increases in the relation between stock recommendations and V/P after the implementation of the Rule are greater for the stocks recommended by analysts with greater potential conflicts of interest. Our findings suggest that the implementation of Rule 2711 has enhanced analysts' independence.

Analyst Information Processing, Financial Regulation, and Academic Research

2009 ◽  
Vol 84 (4) ◽  
pp. 1073-1083 ◽  
Author(s):  
Mark T. Bradshaw
Keyword(s):  
Information Processing ◽  
Financial Regulation ◽  
Conflicts Of Interest ◽  
Research Question ◽  
Academic Research ◽  
Earnings Forecasts ◽  
Stock Recommendations ◽  
Market Participants ◽  
Regulatory Changes ◽  
Similarities And Differences

ABSTRACT: Changes in regulations governing capital markets always provide a rich setting for archival researchers to examine how such changes affect the behavior of market participants. Barniv et al. (2009; hereafter, BHMT) and Chen and Chen (2009; hereafter CC) examine the impacts of recently enacted regulations aimed at curbing perceived abused by sell-side analysts. There were no less than six significant regulations issued between 2000 and 2003 that affected the activities of analysts. BHMT and CC emphasize different regulations, but both predict that analysts' recommendation will be less biased as a result of the collective regulatory changes. The evidence in both studies is strong and convincing that the association between analysts' earnings forecasts and stock recommendations has changed, consistent with analysts' personal conflicts of interest having less impact on their analyses. However, the attribution of what regulation, if any, effected this change is less clear. Collectively, the similarities and differences in the studies provide a nice setting to understand how different authors approach the same research question.

Analysts' Conflicts of Interest and Biases in Earnings Forecasts

2007 ◽  
Vol 42 (4) ◽  
pp. 893-913 ◽  
Author(s):  
Louis K. C. Chan ◽  
Jason Karceski ◽  
Josef Lakonishok
Keyword(s):  
Conflicts Of Interest ◽  
Earnings Forecasts ◽  
Investment Banking ◽  
International Markets ◽  
Forecast Revisions ◽  
Bull Market ◽  
Earnings Surprises ◽  
Banking Business ◽  
Growth Stocks

AbstractAnalysts' earnings forecasts are influenced by their desire to win investment banking clients. We hypothesize that the equity bull market of the 1990s, along with the boom in investment banking business, exacerbated analysts' conflicts of interest and their incentives to strategically adjust forecasts to avoid earnings disappointments. We document shifts in the distribution of earnings surprises and related changes in the market's response to surprises and forecast revisions. The evidence for shifts is stronger for growth stocks, where conflicts of interest are more pronounced. However, shifts are less notable for analysts without ties to investment banking and in international markets.

Individual Analysts' Stock Recommendations, Earnings Forecasts, and the Informativeness of Conference Call Question and Answer Sessions

2020 ◽  
Vol 95 (6) ◽  
pp. 311-337 ◽  
Author(s):  
William J. Mayew ◽  
Mani Sethuraman ◽  
Mohan Venkatachalam
Keyword(s):  
Capital Market ◽  
Stock Prices ◽  
Stock Price ◽  
Earnings Forecasts ◽  
Corporate Management ◽  
Conference Call ◽  
Stock Recommendations ◽  
Market Effects ◽  
Ex Ante ◽  
Negative Tone

ABSTRACT This paper deepens our understanding of the anatomy of an earnings conference call. Prior research indicates that, on average, analysts providing bullish stock recommendations or beatable earnings forecasts benefit from greater access to corporate management. Therefore, we analyze whether and to what extent individual analysts' ex ante stock recommendations and earnings forecasts affect the information content of analyst-manager conversations. Using intraday absolute stock price reactions around specific analyst-manager dialogs to measure informativeness, we find that manager dialogs with bearish analysts whose forecasts are missed are more informative. Such analysts engage in longer conversations with more back-and-forth iterations and exhibit a more negative tone, relative to bullish analysts that provide beatable forecasts. Stock prices directionally respond to both the analyst's linguistic tone and the manager's voice pitch. In sum, the capital market effects during an earnings conference call are far more nuanced than previously documented.

Concurrent Earnings Announcements and Analysts' Information Production

2019 ◽  
Vol 95 (1) ◽  
pp. 165-189 ◽  
Author(s):  
Matthew Driskill ◽  
Marcus P. Kirk ◽  
Jennifer Wu Tucker
Keyword(s):  
Earnings Announcements ◽  
Financial Analysts ◽  
Earnings Forecasts ◽  
Data Availability ◽  
Limited Attention ◽  
Conference Calls ◽  
Stock Recommendations ◽  
Rich Information ◽  
Sample Firm ◽  
Jel Classifications

ABSTRACT We examine whether financial analysts are subject to limited attention. We find that when analysts have another firm in their coverage portfolio announcing earnings on the same day as the sample firm (a “concurrent announcement”), they are less likely to issue timely earnings forecasts for the sample firm's subsequent quarter than analysts without a concurrent announcement. Among the analysts who issue timely earnings forecasts, the thoroughness of their work decreases as their number of concurrent announcements increases. In addition, analysts are more sluggish in providing stock recommendations and less likely to ask questions in earnings conference calls as their number of concurrent announcements increases. Moreover, when analysts face concurrent announcements, they tend to allocate their limited attention to firms that already have rich information environments, leaving behind firms in need of attention. Overall, our evidence suggests that even financial analysts, who serve as information specialists, are subject to limited attention. JEL Classifications: G10; G11; G17; G14. Data Availability: Data are publicly available from the sources identified in the paper.

scholarly journals Stock Investment and Excess Returns: A Critical Review in the Light of the Efficient Market Hypothesis

2019 ◽  
Vol 12 (2) ◽  
pp. 97 ◽  
Author(s):  
Qianwei Ying ◽  
Tahir Yousaf ◽  
Qurat ul Ain ◽  
Yasmeen Akhtar ◽  
Muhammad Shahid Rasheed
Keyword(s):  
Capital Markets ◽  
Stock Prices ◽  
Intrinsic Value ◽  
Efficient Market Hypothesis ◽  
Investment Strategies ◽  
Excess Returns ◽  
Efficient Market ◽  
Market Anomalies ◽  
Replication Studies ◽  
Stock Investment

The expansion of investment strategies and capital markets is altering the significance and empirical rationality of the Efficient Market Hypothesis. The vitality of capital markets is essential for efficiency research. The authors explore here the development and contemporary status of the efficient market hypothesis by emphasizing anomaly/excess returns. Investors often fail to get excess returns; however, thus far, market anomalies have been witnessed and stock prices have diverged from their intrinsic value. This paper presents an analysis of anomaly returns in the presence of the theory of the efficient market. Moreover, the market efficiency progression is reviewed and its present status is explored. Finally, the authors provide enough evidence of a data snooping issue, which violates and challenges the existing proof and creates room for replication studies in modern finance.

Analysts’ Incentives to Overweight Management Guidance When Revising Their Short-Term Earnings Forecasts

2010 ◽  
Vol 85 (5) ◽  
pp. 1617-1646 ◽  
Author(s):  
Mei Feng ◽  
Sarah McVay
Keyword(s):  
Forecast Accuracy ◽  
Earnings Forecasts ◽  
Investment Banking ◽  
Equity Offerings ◽  
Short Term ◽  
Management Guidance ◽  
Banking Business

ABSTRACT: We document that, when revising their short-term earnings forecasts in response to management guidance, analysts wishing to curry favor with management weight the guidance more heavily than predicted, based on the credibility and usefulness of the guidance. This overweighting of guidance is present prior to equity offerings and other events that could lead to investment banking business. Although analysts sacrifice their forecast accuracy by overweighting management guidance, they appear to benefit, on average, by subsequently gaining the underwriting business for their banks. Thus, while analysts wishing to please managers are optimistic in their long-term earnings forecasts, they take their cue from management when determining their short-term earnings forecasts.

Comment on "Deregulation and Risk: Evidence from Earnings Forecasts and Stock Prices"

1993 ◽  
Vol 22 (1) ◽  
pp. 19 ◽  
Author(s):  
Susan E. Moeller ◽  
Duncan J. Kretovich ◽  
James Ifflander
Keyword(s):  
Stock Prices ◽  
Earnings Forecasts

The Contagion Effects of Accounting Restatements

2008 ◽  
Vol 83 (1) ◽  
pp. 83-110 ◽  
Author(s):  
Cristi A. Gleason ◽  
Nicole Thorne Jenkins ◽  
W. Bruce Johnson
Keyword(s):  
Stock Prices ◽  
Earnings Forecasts ◽  
Shareholder Wealth ◽  
Share Price ◽  
Financial Statement ◽  
Accounting Quality ◽  
Contagion Effect ◽  
Accounting Restatements ◽  
Peer Firms ◽  
External Auditor

We predict and find that accounting restatements that adversely affect shareholder wealth at the restating firm also induce share price declines among non-restating firms in the same industry. These share price declines are unrelated to changes in analysts' earnings forecasts, but instead seem to reflect investors' accounting quality concerns. Peer firms with high industry-adjusted accruals experience a more pronounced share price decline than do low-accrual firms. This accounting contagion effect is concentrated among revenue restatements by relatively large firms in the industry. We also find that investors impose a larger penalty on the stock prices of peer firms with high earnings and high accruals when peer and restating firms use the same external auditor. Our results are consistent with the notion that some accounting restatements cause investors to reassess the financial statement information previously released by non-restating firms.

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