Analysts Say
Analysts’
conflict of interest and biases in earnings forecasts, by Louis Chan, Jason Karveski, and Josef
Lakonishok, Working Paper #9544, National Bureau of Economic Research, 1050 Massachusetts Avenue,
Cambridge, MA 02138, March 2003. This paper confirms, in spades, the degree to which the
investment banking business biased analysts’ forecasts and exacerbated their efforts to avoid
disappointing clients. The authors support their case with a wealth of hard data and empirical
material.
Analyzing
the analysts: Career concerns and biased earnings forecasts, by Harrison Hong
and Jeffrey Kubik, Journal of Finance, February 2003. This exhaustive
study analyzes the forecast histories of roughly 12,000 analysts working for
600 brokerage houses between the years of 1983 and 2000 to determine the relationships
between forecast success and job changes. Sorry folks, the sins of the late 1990s
were nothing new: they appear to have been embedded in the system at least as
far back as the early 1980s. Earnings forecast accuracy tends to lead to better
jobs, and, even more forcefully, forecast inaccuracy leads to demotions or jobs
in less prestigious houses. But after controlling for accuracy, the authors find
that analysts whose forecasts are higher than the consensus forecasts are much
more likely to move up in the hierarchy than analysts with either no bias or
a downward bias in their forecasts. When it comes to making judgments on stocks
underwritten by the employer, optimism is much more important than accuracy as
a route to promotion.
Information
content of equity analyst reports, by Paul Asquith, Michael Mikhail,
and Andrea Au, Working Paper 9246, National
Bureau of Economic Research, 1050 Massachusetts Avenue, Cambridge,
MA 02138, October 2002. How do investors respond to the information
in the reports they receive from security analysts? Which matters more,
changes in earnings forecasts or changes in projected price targets?
This paper demonstrates that revisions in price targets produce a larger
reaction than earnings revisions. The price target revisions appear
to be correct in slightly over 50% of the cases studied, but market
reaction seems impervious to the analyst’s valuation methodology.
Show
me the cash flow! By Alfred Rappaport, Fortune Magazine, September
18, 2002. Rappaport is an authoritative source
on matters of accounting. This article sets forth the reasons why current
income statement accounting is a failure. Rappaport sets forth the
basic principles for analyzing cash flow and for making the necessary
adjustments in the income statement to reveal what is happening to
the company’s liquidity. Rappaport calls the statement resulting
from his adjustments the “value relevant income statement.”
“The Level and Persistence of Growth Rates,” by
Louis Chan, Jason Karceski, and Josef Lakonishok, University of Illinois,
340 Commerce Bldg.,1206 South Sixth Street, Champaign, IL 61820. Based
on an exhaustive statistical analysis, this paper has a simple conclusion
about analysts’ efforts to generate long-run forecasts of corporate
earnings: “There is scant persistence in growth beyond chance,
and limited ability to identify firms with high future long-term growth.”
