Determinants of the relationship between investor sentiment and analysts’ private information production

Keshk, Walied; Wang, Jeff J.

doi:10.1111/jbfa.12340

Cited by 21 publications

(7 citation statements)

References 79 publications

(119 reference statements)

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“…Third, stronger recent declines in a firm's stock price put more pressure on managers to communicate with investors and correct undervaluation (Bushee and Miller 2012;Sletten 2012). Price declines also create stronger incentives for analysts to build into their target prices manager-supplied information that is relevant to undervaluation (Cunningham 2021;Graham and Zweig 2006;Keshk and Wang 2018). Accordingly, we predict that the mapping of analyst-claimed undervaluation into future returns will be negatively associated with prior-period returns.…”

Section: Introductionmentioning

confidence: 93%

The asymmetric mispricing information in analysts’ target prices

2022

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We study the mispricing information present in the target prices of US and international analysts. We hypothesize that asymmetry in the value-relevance of the information that managers supply to analysts, combined with asymmetry in the incentives facing analysts to curry favor with managers, leads to analyst-claimed undervaluation being more predictive of future stock returns than analyst-claimed overvaluation. Our empirical tests isolate analyst-claimed mispricing by first removing analysts’ estimates of the cost of equity from the returns implied by target prices and then separating analyst-claimed undervaluation from overvaluation. We find that target prices only predict future returns (at 16 cents to 18 cents on the dollar) when analysts claim undervaluation, not when they claim overvaluation. We also observe that analyst-claimed undervaluation predicts future returns more strongly after firms experience low returns and when macro-driven valuation uncertainty is low.

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Section: Introductionmentioning

confidence: 93%

The asymmetric mispricing information in analysts’ target prices

2022

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“…Without knowing exactly the extent to which total dispersion proxies for uncertainty or information asymmetry among analysts, it is difficult to interpret the literature’s results on the consequences of analyst forecast dispersion, as the cross-sectional difference of analyst forecast dispersion could be driven by either uncertainty or information asymmetry among analysts due to individual analysts’ private information acquisition. A more recent study by Keshk and Wang (2018) uses the decomposition of analyst forecast in the context of investigating analysts’ private information production when investor sentiment changes. This paper also follows their methodology and decomposes analyst forecast dispersion directly into two components in the main analysis.…”

Section: Literature Reviewmentioning

confidence: 99%

Does analyst forecast dispersion represent investors’ perceived uncertainty toward earnings?

Wang

2020

RAF

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Purpose This paper aims to investigate the association between analyst forecast dispersion and investors’ perceived uncertainty toward earnings. Design/methodology/approach A new measure for investors’ expectations of earnings announcement uncertainty is constructed, using changes in implied volatility of option contracts prior to earnings announcements. Unlike other proxies of uncertainty, this measure isolates the incremental uncertainty regarding the upcoming earnings announcement and is a forward-looking measure. Findings Using this new proxy, this paper finds a significant negative correlation between analyst forecast dispersion and investors’ uncertainty regarding the upcoming earnings announcements. Further tests show that this negative correlation is driven by analysts’ private information acquisition rather than analysts; uncertainty toward upcoming earnings announcements. Additional cross-sectional tests show that this negative relationship is more pronounced in the subsample with lower earnings quality. Social implications This paper helps to further the understanding of the information content of analyst forecast dispersion, particularly the ways in which they gather and produce private information and their incentives for so doing. Originality/value This paper introduces a new market-based and forward-looking proxy of earnings announcement uncertainty that should be useful in future research. This paper also provides original empirical evidence that analysts gather and produce an additional private information to the market when facing noisy signals and that their information reduces investors’ uncertainty toward upcoming earnings announcements.

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“…Research also supports short sellers' behavior providing information. For example, Cassell et al 2011reports evidence of auditors' reliance on short ratios to signal risk of financial misstatement, Keshk and Wang (2018) demonstrate that in an over-optimistic environment, high short ratio signals to other information users and influences their beliefs.…”

Section: Short Selling Research Begins Withmentioning

confidence: 99%

Do Corporate Restructuring Announcements Imply Bad News? Evidence from Short Selling

Henderson¹,

Jahan²,

Reichelt³

2020

Preprint

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Despite a lengthy record of research into equity market investors' short-term responses to restructuring announcements, results remain ambiguous. In this study, we investigate investors' reactions to restructuring announcements based on the behavior of short sellers. Relative to other equity investors, short sellers are better equipped to discern whether restructuring plans will succeed. In a sample of corporate restructurings announced from 2010 to 2017, we find evidence of increased trading by short sellers on and after (but not before) restructuring announcements. We find a modest but significant association between short selling activity on or after the restructuring announcement and negative future stock returns. For cost restructurings, we find evidence of a strong association between short selling activity and the restructuring announcement and negative future stock returns, but not for asset restructurings. This result suggests short sellers only trade profitably on cost restructuring announcements, meaning those firms' restructuring announcements foretold bad news.

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Determinants of the relationship between investor sentiment and analysts’ private information production

Cited by 21 publications

References 79 publications

The asymmetric mispricing information in analysts’ target prices

The asymmetric mispricing information in analysts’ target prices

Does analyst forecast dispersion represent investors’ perceived uncertainty toward earnings?

Do Corporate Restructuring Announcements Imply Bad News? Evidence from Short Selling

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