Three Essays On Analyst Earnings Forecast PDF Download

This dissertation, "Three Essays on Equity Analysts' Agent Role and Investor Inattention" by Zhelei, Li, 李哲磊, was obtained from The University of Hong Kong (Pokfulam, Hong Kong) and is being sold pursuant to Creative Commons: Attribution 3.0 Hong Kong License. The content of this dissertation has not been altered in any way. We have altered the formatting in order to facilitate the ease of printing and reading of the dissertation. All rights not granted by the above license are retained by the author. Abstract: This thesis includes two essays on equity analysts' agent role and one essay on investors' inattention to good news. From a broader economic perspective, equity analysts are essentially agents acting on behalf of multiple principals including their employers, investors and issuers (Fisch & Sale, 2003). Classic agency theory predicts that analysts selectively provide coverage and report their expectations. In the first essay, I examine empirically if incremental investment value can be uncovered from analysts' choices between silence and speech, measured as the level of analyst reporting not explained by size or turnover. I find that "silence" negatively, and "speech" positively predicts future stock returns. More importantly, as "speech is silver, silence is golden," the observed price shift is mainly driven by silence, providing evidence that analysts' inaction can impede price discovery process. This is consistent with the claims that analysts' expectations are based on valid information, that analyst self-selection is pervasive due to the principal-agent conflicts, and that the loss of information with analyst silence has resulted in some mis-valuation which can be viewed as a form of classic agency cost. The second essay tests if analysts are systematically less forthcoming in reporting bad earnings news when the principal-agent conflicts are exacerbated. I find that analysts' downward consensus earnings forecast revisions are less informative than their upward revisions; that less is more when analysts report bad news - extreme downward revisions contain little incremental information beyond momentum compared with moderate downward revisions; and that the differential richness of information in good and bad news revisions is more pronounced among bigger, more heavily covered stocks and stocks with higher institutional holdings, namely, stocks that are typically more prone to the analyst agency problem. Thus the loss of information in bad news revisions and extreme bad news revisions' lagging behind price action can be viewed as another form of agency cost. In the third essay, I investigate how negativity bias in information processing affects the positive-negative-asymmetry in the stock price continuation phenomenon. Psychology literature document that negative stimuli elicit more attention and negative information is generally processed more thoroughly and is weighed more heavily in impression formation, memory, learning and decision making than positive information (Baumeister, Bratslavsky, Finkenauer, & Vohs, 2001; Rozin & Royzman, 2001). Insofar as people are cognitive misers, all else being equal, investors tend to pay less attention to good news than to bad news. Using earnings announcement as the information shock, I document evidences that investors incorporate bad earnings news to fuller extent than they do with good earnings news. Furthermore, given that psychological biases are typically increased when there is more uncertainty (Hirshleifer, 2001) and ambiguity or uncertainty is often associated with higher risk and the possibility of hostile manipulation, I also find more pronounced asymmetry in post announcement drift when information uncertainty is greater. DOI: 10.5353/th_b5066225 Subjects: Investment analysis Stocks - Psychological aspects