This study examines the effect of the readability of firms’ written communication on the behavior of sell-side financial analysts. Using a measure of the readability of corporate 10-K filings, we document that analyst following, the amount of effort incurred to generate their reports, and the informativeness of their reports are greater for firms with less readable 10-Ks. Additionally, we find that less readable 10-Ks are associated with greater dispersion, lower accuracy, and greater overall uncertainty in analyst earnings forecasts. Overall, our results are consistent with the prediction of an increasing demand for analyst services for firms with less readable communication and a greater collective effort by analysts for firms with less readable disclosures. Our results contribute to the understanding of the role of analysts as information intermediaries for investors and the effect of the complexity of written financial communication on the usefulness of this information.

We document that purchasing~selling short! stocks with the most~least! favorable consensus recommendations, in conjunction with daily portfolio rebalancing and a timely response to recommendation changes, yield annual abnormal gross returns greater than four percent. Less frequent portfolio rebalancing or a delay in reacting to recommendation changes diminishes these returns; however, they remain significant for the least favorably rated stocks. We also show that high trading levels are required to capture the excess returns generated by the strategies analyzed, entailing substantial transactions costs and leading to abnormal net returns for these strategies that are not reliably greater than zero. THIS STUDY EXAMINES WHETHER INVESTORS can profit from the publicly available recommendations of security analysts. Academic theory and Wall Street practice are clearly at odds regarding this issue. On the one hand, the semistrong form of market efficiency posits that investors should not be able to trade profitably on the basis of publicly available information, such as analyst recommendations. On the other hand, research departments of brokerage houses spend large sums of money on security analysis, presumably because these firms and their clients believe its use can generate superior returns.

Using a large database of analysts' target prices issued over the period 19971 999, we examine short-term market reactions to target price revisions and long-term comovement of target and stock prices.We ¢nd a signi¢cant market reaction to the information contained in analysts' target prices, both unconditionally and conditional on contemporaneously issued stock recommendation and earnings forecast revisions. Using a cointegration approach, we analyze the long-term behavior of market and target prices. We ¢nd that, on average, the one-year-ahead target price is 28 percent higher than the current market price. ACADEMICS, PRACTITIONERS, AND INDIVIDUAL INVESTORS have long been interested in un-derstanding the value and usefulness of sell-side analysts' equity reports. In recent years, security analysts have been increasingly disclosing target prices in these reports, along with their stock recommendations and earnings forecasts. These target prices provide market participants with analysts' most concise and explicit statement on the magnitude of the ¢rm's expected value. Despite the increasing prominence of target prices, their role in conveying information to market participants and their contribution to the formation of equity prices have remained largely unexplored. 1 This paper provides new evidence on these issues.

This study examines analyst information intermediary roles using a textual analysis of analyst reports and corporate disclosures. We employ a topic modeling methodology from computational linguistic research to compare the thematic content of a large sample of analyst reports issued promptly after earnings conference calls with the content of the calls themselves. We show that analysts discuss exclusive topics beyond those from conference calls and interpret topics from conference calls. In addition, we find that investors place a greater value on new information in analyst reports when managers face greater incentives to withhold value-relevant information. Analyst interpretation is particularly valuable when the processing costs of conference call information increase. Finally, we document that investors react to analyst report content that simply confirms managers' conference call discussions. Overall, our study shows that analysts play the information intermediary roles by discovering information beyond corporate disclosures and by clarifying and confirming corporate disclosures.