Analysts’ Recommendation Revisions and Subsequent Earnings Surprises

Palmon, Dan; Yezegel, Ari

doi:10.1177/0148558x11401556

Cited by 20 publications

(10 citation statements)

References 37 publications

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“…Since analysts are likely to go along with the majority in their stock recommendations (Jegadeesh and Kim 2010), multiple analyst stock recommendations for a particular stock could be simultaneously upgraded or downgraded. Furthermore, a †Our prediction might be supported by the findings of Palmon and Yezegel (2011), who show that analysts tend to upgrade (or downgrade) stock recommendations just before positive (or negative) surprise earnings announcements. However, although a positive association between earnings forecast revisions and subsequent earnings surprises could occur through an unsynchronized update of each analyst's forecast (O'Brien 1990), their study does not include earnings forecast revisions as a control variable when analysing the relationship between stock recommendation revisions and subsequent earnings surprises.…”

Section: Slow Price Reaction To Recommendation Revisionsmentioning

confidence: 54%

Slow price reactions to analysts’ recommendation revisions

Miwa¹,

Ueda

2014

Quantitative Finance

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This study explores the reasons for the slow price reactions to analysts' recommendation revisions. We predict that analysts' recommendation revisions contain earnings-related information that is not incorporated in analysts' earnings forecasts and that the slow price reaction is attributable to a gradual incorporation of this earnings-related information into stock prices. We find that, consistent with our prediction, stocks with recommendation upgrades subsequently experience more upward earnings forecast revisions than stocks with recommendation downgrades, and that the differences in subsequent stock returns between upgraded and downgraded stocks is attributable to differences between subsequent earnings forecast (especially, FY2 earnings forecast) revisions.

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Section: Slow Price Reaction To Recommendation Revisionsmentioning

confidence: 54%

Slow price reactions to analysts’ recommendation revisions

Miwa¹,

Ueda

2014

Quantitative Finance

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“…A consensus finding in the literature is that analysts struggle with complexity or uncertainty that leads to more disagreement among analysts (Lehavy et al 2011) and inaccurate (Duru and Reeb 2002;Plumlee 2003;Lehavy et al 2011) or biased forecasts (Ackert and Athanassakos 1997;Duru and Reeb 2002;Zhang 2006). However, other studies suggest analysts have incentives to cover more complicated or complex firms (Barth, Kasznik, and McNichols 2001;Palmon and Yezegel 2011;Lehavy et al 2011). We address how managers and analysts respond to complexity.…”

Section: Introductionmentioning

confidence: 96%

“…) or biased forecasts (Ackert and Athanassakos ; Duru and Reeb ; Zhang ). However, other studies suggest analysts have incentives to cover more complicated or complex firms (Barth, Kasznik, and McNichols ; Palmon and Yezegel ; Lehavy et al. ).…”

Section: Introductionmentioning

confidence: 99%

Financial Statement Complexity and Meeting Analysts’ Expectations

Filzen

Peterson²

2015

Contemporary Accting Res

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We examine whether firms with greater financial statement complexity are more likely to meet or beat analysts’ earnings expectations. We proxy for financial statement complexity using the firm's industry and year adjusted accounting policy disclosure length. Firms with more complex financial statements are more likely to just beat expectations than just miss expectations. Firms with complex financial statements appear to use expectations management to beat expectations, but do not use earnings management. Corroborating these findings, we find analysts rely more on management guidance for more complex firms. Firms with complex financial statements are also more likely to have analysts exclude items from actual “street earnings,” but tests suggest this strategy is not specifically used by complex firms to beat expectations. The effect we document is specific to analyst forecasts and not to other alternative benchmarks.

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“…However, these analysts are unable to sustain their forecasting superiority in the post-Reg FD period, which suggests that there has been a leveling of the information playing field among analysts. Palmon and Yezegel (2011) also find a significant decline in the predictive value of analysts' recommendations for identifying earnings surprises after Reg FD took effect. Z.…”

Section: Securities and Exchange Commission (Sec) Approved On Augustmentioning

confidence: 82%

Which Analysts Lead the Herd in Stock Recommendations?

Booth

Chang

Zhou

2014

Journal of Accounting, Auditing & Finance

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This article identifies a leader-follower relationship in stock recommendations and documents the characteristics of lead analysts. We develop a metric for identifying lead analysts based on the observation that lead analysts have directed a ''path'' for the consensus in the past year. We find that recommendations are more likely to direct a path for the consensus when they are issued by lead analysts, accompanied by concurrent earnings forecast in the same direction from the same analysts, away from the consensus, followed by price momentum, issued on large and high growth firms, and issued by analysts from large brokers with less frequent recommendations. This result still holds even after controlling for public information, excluding news announcement dates, Regulation Fair Disclosure legislation, and other robustness checks. Empirical analysis shows that there is a greater market reaction to the recommendations of lead analysts than others. Keywords herd, lead, stock recommendations, analystIn this research, we look at the leading-herding behavior of equity analysts. There is an extensive literature on whether analysts herd and which analysts herd. However, there is sparse research on which analysts lead the herd in stock recommendations. This is surprising given the view that identifying lead analysts is important for investors in deciding which analysts to listen to, given that analysts' stock recommendations have investment value. 1 In this article, we fill this gap by providing a method of identifying lead analysts in stock recommendations. We further examine which analysts are more likely to lead and whether lead analysts' recommendations cause greater market reaction.Research (Cooper, Day, & Lewis, 2001) has so far examined which analysts lead the herd in terms of earnings forecasts. However, given the differences between earnings forecasts and stock recommendations, it is important to identify lead analysts using stock recommendations. First, in addition to earnings, analysts need other information to generate Downloaded from stock recommendations. For example, analysts estimate the discount rate when using discount dividend models and benchmark price-earnings (PE) ratios when using price comparables. Second, some analysts use price patterns rather than earnings to generate stock recommendations. Lo and Hasanhodzic (2009) interview leading practitioners of technical analysis and reveal that some analysts make recommendations on patterns in the recent history of prices. Academic researchers (e.g., Altinkilic & Hansen, 2009;Jegadeesh, Kim, Krische, & Lee, 2004) also confirm that analysts often follow a momentum strategy. Third, some analysts make stock recommendations, but do not issue earnings forecasts, making it impossible to judge recommendations based on forecast ability. Loh and Stulz (2011) find that only half the analysts contemporaneously revise earnings when they issue stock recommendations. Jegadeesh and Kim (2010) find that even within the subsample of contemporaneous revisions, only half the...

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Analysts’ Recommendation Revisions and Subsequent Earnings Surprises

Cited by 20 publications

References 37 publications

Slow price reactions to analysts’ recommendation revisions

Slow price reactions to analysts’ recommendation revisions

Financial Statement Complexity and Meeting Analysts’ Expectations

Which Analysts Lead the Herd in Stock Recommendations?

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