Hostname: page-component-77c89778f8-fv566 Total loading time: 0 Render date: 2024-07-22T03:13:06.624Z Has data issue: false hasContentIssue false
  • English
  • Français

Analysts’ Incentives to Produce Industry-Level versus Firm-Specific Information

Published online by Cambridge University Press:  15 February 2011

Mark H. Liu
Mark H. Liu*
Affiliation:
University of Kentucky, 437A Gatton College of Business and Economics, Lexington, KY 40506. mark.liu@uky.edu
Get access Rights & Permissions [Opens in a new window]

Abstract

Using stock returns around recommendation changes to measure the information produced by analysts, I find that analysts produce more firm-specific than industry-level information. Analysts produce more firm-specific information on stocks with higher idiosyncratic return volatilities. The amount of industry information produced by analysts increases with the absolute value of the stock’s industry beta and decreases with the stock’s idiosyncratic volatility. Other stocks in the industry also respond to the recommendation change, and the magnitude of the response increases with the absolute value of the industry beta of the recommended stock and that of other stocks in the industry. I also offer results on how investors may use analyst research more effectively and potentially improve their investment performance.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 46 , Issue 3 , June 2011 , pp. 757 - 784
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2011

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Ashbaugh-Skaife, H.; Gassen, J.; and LaFond, R.. “Does Stock Price Synchronicity Represent Firm-Specific Information? The International Evidence.” Working Paper, University of Wisconsin-Madison (2005).CrossRefGoogle Scholar
Ayers, B., and Freeman, R. N.. “Market Assessment of Industry and Firm Earnings Information.” Journal of Accounting and Economics, 24 (1997), 205–218.CrossRefGoogle Scholar
Barber, B.; Lehavy, R.; McNichols, M.; and Trueman, B.. “Can Investors Profit from the Prophets? Security Analyst Recommendations and Stock Returns.” Journal of Finance, 56 (2001), 531–563.CrossRefGoogle Scholar
Boni, L., and Womack, K. L.. “Analysts, Industries, and Price Momentum.” Journal of Financial and Quantitative Analysis, 41 (2006), 85–109.CrossRefGoogle Scholar
Brav, A., and Lehavy, R.. “An Empirical Analysis of Analysts’ Target Prices: Short-Term Informativeness and Long-Term Dynamics.” Journal of Finance, 58 (2003), 1933–1967.CrossRefGoogle Scholar
Brennan, M. J., and Hughes, P. J.. “Stock Prices and the Supply of Information.” Journal of Finance, 46 (1991), 1665–1691.CrossRefGoogle Scholar
Carleton, W. T.; Chen, C. R.; and Steiner, T. L.. “Optimism Biases among Brokerage and Non- Brokerage Firms’ Equity Recommendations: Agency Costs in the Investment Industry.” Financial Management, 27 (1998), 17–30.CrossRefGoogle Scholar
Chan, K., and Hameed, A.. “Stock Price Synchronicity and Analyst Coverage in Emerging Markets.” Journal of Financial Economics, 80 (2006), 115–147.CrossRefGoogle Scholar
Chan, L. K. C.; Karceski, J.; and Lakonishok, J.. “Analysts’ Conflicts of Interest and Biases in Earnings Forecasts.” Journal of Financial and Quantitative Analysis, 42 (2007), 893–913.CrossRefGoogle Scholar
Conrad, J. S.; Johnson, K. M.; and Wahal, S.. “Institutional Trading and Soft Dollars.” Journal of Finance, 56 (2001), 397–416.CrossRefGoogle Scholar
Durnev, A.; Morck, R.; and Yeung, B.. “Value-Enhancing Capital Budgeting and Firm-Specific Stock Return Variation.” Journal of Finance, 59 (2004), 65–105.CrossRefGoogle Scholar
Durnev, A.; Morck, R.; Yeung, B.; and Zarowin, P.. “Does Greater Firm-Specific Return Variation Mean More or Less Informed Stock Pricing?” Journal of Accounting Research, 41 (2003), 797–836.CrossRefGoogle Scholar
Easterwood, J. C., and Nutt, S. R.. “Inefficiency in Analysts’ Earnings Forecasts: Systematic Misreaction or Systematic Optimism?” Journal of Finance, 54 (1999), 1777–1797.CrossRefGoogle Scholar
Forbes, W.; Huijgen, C.; and Plantinga, A.. “Using Analysts’ Earnings Forecasts for Country/Industry-Based Asset Allocation.” Managerial Finance, 32 (2006), 317–336.CrossRefGoogle Scholar
Gilson, S. C.; Healy, P. M.; Noe, C. F.; and Palepu, K. G.. “Analyst Specialization and Conglomerate Stock Breakups.” Journal of Accounting Research, 39 (2001), 565–582.CrossRefGoogle Scholar
Irvine, P.; Lipson, M.; and Puckett, W. A.. “Tipping.” Review of Financial Studies, 20 (2007), 741–768.CrossRefGoogle Scholar
Kelly, P. J. “Information Efficiency and Firm-Specific Return Variation.” Working Paper, Arizona State University (2005).CrossRefGoogle Scholar
Lee, D. W., and Liu, M. H.. “Does More Information in Stock Price Lead to Greater or Smaller Idiosyncratic Return Volatility?” Journal of Banking and Finance, 35 (2011), 1563–1580.CrossRefGoogle Scholar
Lim, T. “Rationality and Analysts’ Forecast Bias.” Journal of Finance, 56 (2001), 369–385.CrossRefGoogle Scholar
Lys, T., and Sohn, S.. “The Association between Revisions of Financial Analysts’ Earnings Forecasts and Security-Price Changes.” Journal of Accounting and Economics, 13 (1990), 341–363.CrossRefGoogle Scholar
Michaely, R., and Womack, K. L.. “Conflict of Interest and the Credibility of Underwriter Analyst Recommendations.” Review of Financial Studies, 12 (1999), 653–686.CrossRefGoogle Scholar
Mikhail, M. B.; Walther, B. R.; and Willis, R. H.. “Do Security Analysts Improve their Performance with Experience?” Journal of Accounting Research, 35 (1997), 131–157.CrossRefGoogle Scholar
Mikhail, M. B.; Walther, B. R.; and Willis, R. H.. “Do Security Analysts Exhibit Persistent Differences in Stock Picking Ability?” Journal of Financial Economics, 74 (2004), 67–91.CrossRefGoogle Scholar
Park, C. W., and Stice, E. K.. “Analyst Forecasting Ability and the Stock Price Reaction to Forecast Revisions.” Review of Accounting Studies, 5 (2000), 259–272.CrossRefGoogle Scholar
Piotroski, J. D., and Roulstone, B. T.. “The Influence of Analysts, Institutional Investors, and Insiders on the Incorporation of Market, Industry, and Firm-Specific Information into Stock Prices.” Accounting Review, 79 (2004), 1119–1151.CrossRefGoogle Scholar
Sharpe, W. F. “Mutual Fund Performance.” Journal of Business, 39 (1966), 119–138.CrossRefGoogle Scholar
Stickel, S. E. “The Anatomy of the Performance of Buy and Sell Recommendations.” Financial Analysts Journal, 51 (1995), 25–39.CrossRefGoogle Scholar
Womack, K. L. “Do Brokerage Analysts’ Recommendations Have Investment Value?” Journal of Finance, 51 (1996), 137–167.CrossRefGoogle Scholar