Financial Analyst
Author Nisha Kharat
Corporate Governance
HUSSAIN, N. et al (2023) explores the intersection of corporate governance (CG) and corporate social responsibility (CSR) in response to prominent corporate scandals and regulatory changes. Despite ongoing debate, a consensus on the CG-CSR link remains elusive. Recent research advocates for studying governance bundles that combine internal and external mechanisms, with a focus on the often-overlooked role of external monitoring, such as financial analyst coverage. This study fills a gap by empirically testing the bundling hypothesis, confirming strong relationships between different governance configurations and CSR outcomes. Findings suggest that various combinations of monitoring devices can achieve similar results, emphasizing the importance of analyst coverage and board-level mechanisms in achieving CSR objectives. The implications extend to guiding firms in designing effective governance structures and informing regulatory efforts to enhance CSR commitment. However, the study acknowledges limitations such as a US-centric sample and a limited time frame, suggesting avenues for future research to explore international contexts, incorporate additional factors, and examine the contingent effects of governance on CSR and access to finance.
Forecast Accuracy
FORST, A. et al (2019) this study examines the impact of insider ownership structure, specifically insider voting and cash flow rights, on financial analyst forecast accuracy and dispersion within U.S. dual-class firms. Contrary to prior research, the findings reveal distinct effects: while disproportionate insider control correlates negatively with forecast accuracy, it shows a positive association with dispersion. Moreover, insider cash flow rights enhance forecast accuracy, whereas insider voting rights have a detrimental effect. These results, consistent across various controls and estimation techniques, suggest the presence of both incentive-alignment and entrenchment effects. By utilizing U.S. dual-class firms as a laboratory, the study provides insights into the unique information behavior and financial reporting quality of such entities. Given the growing prevalence of dual-class structures, particularly in the technology sector, the study underscores the importance of exercising caution in generating and relying on earnings forecasts for these firms, urging both analysts and investors to carefully consider their implications.
Insiders and Analysts
ELLUL, A and PANAYIDES, M. (2018) introduces a perspective on the interaction between financial analysts and insiders within firms, departing from the conventional focus on analysts’ report in formativeness and their competition. Through a quasi-natural experiment where stocks lose analyst coverage, the study examines the repercussions of coverage termination on trading dynamics and insiders’ profitability. The findings reveal that the cessation of analyst coverage negatively impacts liquidity and price discovery, particularly pronounced in firms with higher insider presence but mitigated by the presence of long-term institutional investors. Post-coverage termination, insiders’ trades become more profitable due to increased information asymmetries, especially in firms without outside financing or earnings guidance. However, firms with a high-information environment and a preference for transparency exhibit reduced exploitation of insider information after coverage termination. This study underscores analysts’ significant contribution to liquidity and price discovery, while highlighting the complex balance between insiders and outsiders in the trading process, beyond the mere quality of analysts’ information.
Financial Reporting
CHAN, D. K. W. and LIU, N. (2022) this paper proposes a framework to analyze how analysts influence the interactions between a company’s owner and its auditor, impacting financial reporting quality. It finds that analyst independence is pivotal, as they act as disciplinarians, shaping audit quality and deterring fraud. Regulatory measures may complement or counteract each other, requiring coordination. Analysts’ unique attributes, like timely information access, distinguish them from other agents. Future research could explore interactions with internal disciplinary agents. Overall, the study underscores the need for comprehensive regulatory frameworks to ensure transparency in financial reporting. Their model emphasizes the analyst’s role as the disciplinarian-of-disciplinarian to incentivize audit quality and disincentivize fraudulent financial reporting, as well as its consequential effect on helping investors to optimize their investment decisions. Although other external agents could serve a similar disciplinary role, analysts differentiate from them in several notable dimensions, such as information sources and processing ability, information dissemination timeliness, and conflicts of interest.
Asset Management
GOETZMANN, W. N. (2020) emphasis that asset management is one of society’s most important activities. It is a huge fiduciary responsibility to manage the assets on which the future livelihood of households and vital organizations rely. Without question, therefore, the science of portfolio management has made an important contribution to society. Asset management in the twenty-first century is an improvement over asset management of 100 years ago. More people all over the world have greater access to diversified, regulated, and thoughtfully constructed portfolios than ever before—and often, at a lower cost than before. The Financial Analysts Journal and related publications have played no small role in this development. Society makes progress through institutions. Professional societies and focused journals are vital to this progress. The professional approach to asset management adopted by CFA Institute embraces the idea that fiduciary duty demands not only a mastery of established concepts and methods but also constant learning and sharing of knowledge. Although the adoption of new ideas and tools is difficult, the vehicle by which they are introduced, tested, and adapted makes a huge difference in the ease or difficulty of their spread.
Investment Management.
BROWN, S. J. (2020) states that the introduction of computers into the realm of financial analysis would magnify returns and reduce costs. They went further to argue that the new technology would not only analyze information and speed up the processes that would traditionally be performed by human labor but would also make information accessible that could not have been obtained previously. predicting the transformative impact of computer technology on financial analysis. The integration of high-speed computing and expansive data access has revolutionized the role of financial analysts, shifting their focus from mere data collection to strategic decision-making. This shift entails leveraging technology intelligently, understanding the implications of data for future prospects, and efficiently meeting long-term client objectives. In short, it would help humans act rationally. In this way, prices would more accurately reflect available information, and for this reason financial analysts and investors would not have to spend much time piecing together the past history and current position of a company. They also argued that the appraisal of the future would continue to be characterized by uncertainty, however, even as to the background of a completely transparent present. This appraisal, they argued, is the proper role of financial analysis
Sales Forecasts
KEUNG, E. C. (2010) emphasis that although a vast amount of academic research has examined different aspects of financial analysts’ earnings forecasts, the interaction between earnings forecasts and other supplementary information provided by financial analysts is largely unexplored. In this study, they examine the nature and the market responses to financial analysts’ supplementary sales forecasts. They find that earnings forecast revisions supplemented with sales forecast revisions have a greater impact on security prices, controlling for the incremental information content in sales forecasts. The differences in return responses suggest that investors view supplemented earnings forecast revisions as more credible, and that verifiable supplementary information increases the credibility of earnings forecasts. Furthermore, supplemented earnings forecasts are more accurate ex post, suggesting that financial analysts provide sales forecasts to convey their credibility. To the extent that the provision of sales forecasts is associated with analyst ability, it is an open question as to whether less informed financial analysts would be penalized if they issue ex post inaccurate sales forecasts to mimic their more informed counterparts.
Trading Profits
HAYUNGA, D. K. and LUNG, P. P. (2014) examines that options trading in firms that experience a revision in their consensus recommendation by financial analysts. This lies in the inter-section between two prominent studies in finance: the information content in the options markets and the value of the financial analyst recommendations. They find unique behavior in options market measures days prior to a consensus revision. This paper investigates the dynamics of options trading surrounding consensus recommendation revisions by financial analysts, bridging the gap between options market behavior and analyst recommendations’ value. It uncovers distinctive patterns in options market metrics several days before a consensus revision, indicating informed trading and contributing to price discovery. The findings demonstrate significant information content in the options market, as evidenced by profitable trading strategies based on option-implied and underlying equity prices. Overall, the study underscores the role of options markets in providing valuable insights into market sentiment and expectations surrounding analyst recommendations, offering opportunities for informed investors to capitalize on market inefficiencies.
Maximum Likelihood (ML)
LIU, X. G. and NATARAJAN, R. (2012) both of them analyze the cross-sectional determinants of forecast dispersion and provide large-sample evidence that in addition to being significantly associated with proxies for fundamental risk, uncertainty, and divergence of beliefs, forecast dispersion also suffers from a downward bias. This paper investigates forecast dispersion and uncovers a downward bias attributed to analysts’ strategic behavior, resulting in an underestimation of the true dispersion of unmanaged forecasts. Through extensive analysis, the study identifies fundamental risk, uncertainty, and divergence of beliefs as significant factors influencing forecast dispersion, alongside strategic behavior. By quantifying the downward bias at the firm-quarter level, it demonstrates a substantial understatement of observed dispersion compared to actual dispersion. This highlights potential misinterpretations of analysts’ information environments. The proposed estimation method, grounded in production economics literature and implemented through Maximum Likelihood (ML) estimation routines, offers a precise measure of forecast dispersion. Despite the challenge of directly observing analysts’ beliefs, empirical evidence supports the credibility of the modified dispersion measure, providing valuable insights into analysts’ information-gathering activities and their implications for financial research.
Star analysts
LUO, J.et al (2020) The study investigates how the presence of “superstar” financial analyst’s impacts competition dynamics within the industry. Building on prior research showing the effectiveness of tournament incentives, the study hypothesizes that participants’ willingness to compete depends on perceiving similar winning odds. It predicts that when the chances of winning are diminished by the presence of superstars, non-superstar participants will opt out of competition. Analyzing data from 1993 to 2010, the study finds strong evidence supporting this hypothesis: non star analysts tend to avoid competing with star analysts, leading to fluctuations in analyst coverage. This effect is more pronounced for highly ranked star analysts, in years with higher investor sentiment, and for firms with certain characteristics. Moreover, analysts who consistently avoid competition with stars have higher chances of becoming stars themselves. These findings have implications for designing internal competitions and corporate governance. However, the study acknowledges limitations in establishing causality due to its research design. Overall, the research sheds light on how the presence of superstars influences competition outcomes in professional settings.
Conclusion
The result found that it suffers from being the product of the examination of only a few governance variables, our analysis of different configurations is helpful in understanding that a CG bundle is effective. The examination of forecast accuracy and dispersion in dual-class firms is also of interest as a study of this particular subset of firms in its own right. The use of quasi-natural experiment in which stocks completely lose research coverage for exogenous reasons to investigate whether analyst coverage does indeed have an effect on trading equilibria and insiders’ profitability. The financial reporting model emphasizes the analyst’s role as the disciplinarian-of-disciplinarian to incentivize audit quality and disincentivize fraudulent financial reporting. Asset management is a huge fiduciary responsibility to manage the assets on which the future livelihood of households and vital organizations rely. the appraisal of the future would continue to be characterized by uncertainty, however, even as to the background of a completely transparent present. The earnings forecast revisions supplemented with sales forecast revisions have a greater impact on security prices, controlling for the incremental information content in sales forecasts. The findings demonstrate informed trading by investors and price discovery in the options market. The estimation procedure that they suggest has been in use in the production economics literature for more than three decades. The results of tournament not only are informative by themselves but also support our central hypothesis that the incentive to win the firm-level tournament discourages nonstar analysts from covering the same firm as star analysts
Reference
HUSSAIN, N. et al. (2023). Connecting the Dots: Do Financial Analysts Help Corporate Boards Improve Corporate Social Responsibility? British Journal of Management, [s. l.], v. 34, n. 1, p.363–389,2023.DOI10.1111/1467-8551.12586. Disponívelem : https://research.ebsco.com/linkprocessor/plink?id=a12d501f-40fb-3a0f-9164-c2e68e725ca0. Accesso: 18 fev . 2024.
FORST, A.et al. (2019). Insider Ownership and Financial Analysts’ Information Environment: Evidence from Dual-Class Firms. Journal of Accounting, Auditing & Finance, [s. l.], v. 34, n. 1, p.30–53,2019.DOI10.1177/0148558X16670048. Disponívelem : https://research.ebsco.com/linkprocessor/plink?id=84bbcaa7-1b4e-3549-bfcc-10c2f48f6e93. Accesso em : 19 fev. 2024.
ELLUL, A and PANAYIDES, M. (2018). Do Financial Analysts Restrain Insider’s Informational Advantage? Journal of Financial & Quantitative Analysis, [s. l.], v. 53, n. 1, p. 203–241, 2018. DOI10.1017/S0022109017000990.Disponívelem: https://research.ebsco.com/linkprocessor/plink?id=7257d3fa-c6a2-3df7-92b9-a2168d761bca. Accesso em: 19 fev. 2024.
CHAN, D. K. W. and LIU, N. (2022). Financial Reporting, Auditing, Analyst Scrutiny, and Investment Efficiency. Accounting Review, [s. l.], v.97, n.5, p.163–188, 2022. DOI 10.2308/TAR-2020-0287.Disponívelem: https://research.ebsco.com/linkprocessor/plink?id=57a075a8-5d8a-3ca1-86ba-bdd81455546b. Acesso em: 19 fev. 2024.
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BROWN, S. J. (2020). The Efficient Market Hypothesis, the Financial Analysts Journal, and the Professional Status of Investment Management. Financial Analysts Journal, [s. l.], v. 76, n.2,p.5–14,2020.DOI10.1080/0015198X.2020.1734375.Disponívelem: https://research.ebsco.com/linkprocessor/plink?id=04d1f911-8af1-3a7e-9899-31f94b3aab54. Accesso em: 19 fev. 2024.
KEUNG, E. C. (2010). Do Supplementary Sales Forecasts Increase the Credibility of Financial Analysts’ Earnings Forecasts? Accounting Review, [s. l.], v. 85, n. 6, p. 2047–2074, 2010. DOI 10.2308/accr.2010.85.6.2047.Disponívelem: https://research.ebsco.com/linkprocessor/plink?id=105bf79c-ff2b-32fc-baf3-5636d900e16c. Accesso em: 19 fev. 2024.
HAYUNGA, D. K. and LUNG, P. P. (2014). Trading in the Options Market around Financial Analysts’ Consensus Revisions. Journal of Financial & Quantitative Analysis, [s. l.], v. 49, n. 3, p.725–747,2014.DOI10.1017/S0022109014000295.Disponívelem: https://research.ebsco.com/linkprocessor/plink?id=cc62190f-2edb-3ba3-85d6-c7178a7244f6. Accesso em: 19 fev. 2024.
LIU, X. G. and NATARAJAN, R. (2012). The Effect of Financial Analysts’ Strategic Behavior on Analysts’ Forecast Dispersion. Accounting Review, [s. l.], v. 87, n. 6, p. 2123–2149, 2012. DOI10.2308/accr-50212.Disponívelem: https://research.ebsco.com/linkprocessor/plink?id=3394c24b-a1c9-34c3-873d-cd7eb4bb1012. Accesso em: 20 fev. 2024.
LUO, J.et al. (2020). The Disincentive Effect of Stars: Evidence from Analyst Coverage. Journal of Accounting, Auditing & Finance, [s. l.], v. 35, n. 4, p. 803–828, 2020. DOI 10.1177/0148558X19832096.Disponívelem: https://research.ebsco.com/linkprocessor/plink?id=5b383111-28d8-3d1e-b7cd-b0aa9cdccb03. Accesso em: 20 fev. 2024.