IDEAS home Printed from https://ideas.repec.org/a/eee/jaecon/v53y2012i1p55-76.html
   My bibliography  Save this article

Do financial analysts' long-term growth forecasts matter? Evidence from stock recommendations and career outcomes

Author

Listed:
  • Jung, Boochun
  • Shane, Philip B.
  • Sunny Yang, Yanhua

Abstract

Prior literature portrays long-term growth (LTG) forecasts as nonsensical from a valuation perspective. Instead, we hypothesize that LTG forecasts signal high effort and ability to analyze firms' long-term prospects. We document stronger market response to stock recommendation revisions of analysts who publish accompanying LTG forecasts. We also hypothesize and find that these analysts are less likely to leave the profession or move to smaller brokerage houses. Consistent with Reg. FD's intention to promote fundamental analysis of long-term earnings prospects, post-Reg. FD observations drive our results. Overall, we identify previously undocumented benefits accruing to analysts who publish LTG forecasts.

Suggested Citation

  • Jung, Boochun & Shane, Philip B. & Sunny Yang, Yanhua, 2012. "Do financial analysts' long-term growth forecasts matter? Evidence from stock recommendations and career outcomes," Journal of Accounting and Economics, Elsevier, vol. 53(1), pages 55-76.
    • Handle: RePEc:eee:jaecon:v:53:y:2012:i:1:p:55-76
    DOI: 10.1016/j.jacceco.2011.11.002
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0165410111000905
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jacceco.2011.11.002?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Lin, Hsiou-wei & McNichols, Maureen F., 1998. "Underwriting relationships, analysts' earnings forecasts and investment recommendations," Journal of Accounting and Economics, Elsevier, vol. 25(1), pages 101-127, February.
    2. Warren Bailey & Haitao Li & Connie X. Mao & Rui Zhong, 2003. "Regulation Fair Disclosure and Earnings Information: Market, Analyst, and Corporate Responses," Journal of Finance, American Finance Association, vol. 58(6), pages 2487-2514, December.
    3. Patricia M. Dechow & Amy P. Hutton & Richard G. Sloan, 2000. "The Relation between Analysts' Forecasts of Long†Term Earnings Growth and Stock Price Performance Following Equity Offerings," Contemporary Accounting Research, John Wiley & Sons, vol. 17(1), pages 1-32, March.
    4. Asquith, Paul & Mikhail, Michael B. & Au, Andrea S., 2005. "Information content of equity analyst reports," Journal of Financial Economics, Elsevier, vol. 75(2), pages 245-282, February.
    5. Edward I. Altman, 1968. "The Prediction Of Corporate Bankruptcy: A Discriminant Analysis," Journal of Finance, American Finance Association, vol. 23(1), pages 193-194, March.
    6. Barber, Brad M. & Lehavy, Reuven & Trueman, Brett, 2007. "Comparing the stock recommendation performance of investment banks and independent research firms," Journal of Financial Economics, Elsevier, vol. 85(2), pages 490-517, August.
    7. William R. Gebhardt & Charles M. C. Lee & Bhaskaran Swaminathan, 2001. "Toward an Implied Cost of Capital," Journal of Accounting Research, Wiley Blackwell, vol. 39(1), pages 135-176, June.
    8. La Porta, Rafael, 1996. "Expectations and the Cross-Section of Stock Returns," Journal of Finance, American Finance Association, vol. 51(5), pages 1715-1742, December.
    9. Narasimhan Jegadeesh & Woojin Kim, 2010. "Do Analysts Herd? An Analysis of Recommendations and Market Reactions," The Review of Financial Studies, Society for Financial Studies, vol. 23(2), pages 901-937, February.
    10. Bin Ke & Yong Yu, 2006. "The Effect of Issuing Biased Earnings Forecasts on Analysts' Access to Management and Survival," Journal of Accounting Research, Wiley Blackwell, vol. 44(5), pages 965-999, December.
    11. Partha S. Mohanram & Shyam V. Sunder, 2006. "How Has Regulation FD Affected the Operations of Financial Analysts?," Contemporary Accounting Research, John Wiley & Sons, vol. 23(2), pages 491-525, June.
    12. Stefano Bonini & Laura Zanetti & Roberto Bianchini & Antonio Salvi, 2010. "Target Price Accuracy in Equity Research," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 37(9‐10), pages 1177-1217, November.
    13. Clement, Michael B., 1999. "Analyst forecast accuracy: Do ability, resources, and portfolio complexity matter?," Journal of Accounting and Economics, Elsevier, vol. 27(3), pages 285-303, July.
    14. Lawrence D. Brown & Emad Mohammad, 2010. "Is Analyst Earnings Forecast Ability Only Firm Specific?," Contemporary Accounting Research, John Wiley & Sons, vol. 27(3), pages 727-750, September.
    15. Harrison Hong & Jeffrey D. Kubik & Amit Solomon, 2000. "Security Analysts' Career Concerns and Herding of Earnings Forecasts," RAND Journal of Economics, The RAND Corporation, vol. 31(1), pages 121-144, Spring.
    16. Cowen, Amanda & Groysberg, Boris & Healy, Paul, 2006. "Which types of analyst firms are more optimistic?," Journal of Accounting and Economics, Elsevier, vol. 41(1-2), pages 119-146, April.
    17. Ramnath, Sundaresh & Rock, Steve & Shane, Philip B., 2008. "Financial Analysts' Forecasts and Stock Recommendations: A Review of the Research," Foundations and Trends(R) in Finance, now publishers, vol. 2(4), pages 311-421, September.
    18. Gintschel, Andreas & Markov, Stanimir, 2004. "The effectiveness of Regulation FD," Journal of Accounting and Economics, Elsevier, vol. 37(3), pages 293-314, September.
    19. Harrison Hong & Jeffrey D. Kubik, 2003. "Analyzing the Analysts: Career Concerns and Biased Earnings Forecasts," Journal of Finance, American Finance Association, vol. 58(1), pages 313-351, February.
    20. Liu, J & Thomas, J, 2000. "Stock returns and accounting earnings," Journal of Accounting Research, Wiley Blackwell, vol. 38(1), pages 71-101.
    21. Fama, Eugene F. & French, Kenneth R., 1997. "Industry costs of equity," Journal of Financial Economics, Elsevier, vol. 43(2), pages 153-193, February.
    22. Alon Brav & Reuven Lehavy, 2003. "An Empirical Analysis of Analysts' Target Prices: Short-term Informativeness and Long-term Dynamics," Journal of Finance, American Finance Association, vol. 58(5), pages 1933-1968, October.
    23. DeFond, Mark L. & Hung, Mingyi, 2003. "An empirical analysis of analysts' cash flow forecasts," Journal of Accounting and Economics, Elsevier, vol. 35(1), pages 73-100, April.
    24. Edward I. Altman, 1968. "Financial Ratios, Discriminant Analysis And The Prediction Of Corporate Bankruptcy," Journal of Finance, American Finance Association, vol. 23(4), pages 589-609, September.
    25. Ramnath, Sundaresh & Rock, Steve & Shane, Philip, 2008. "The financial analyst forecasting literature: A taxonomy with suggestions for further research," International Journal of Forecasting, Elsevier, vol. 24(1), pages 34-75.
    26. Wu, Joanna Shuang & Zang, Amy Y., 2009. "What determine financial analysts' career outcomes during mergers?," Journal of Accounting and Economics, Elsevier, vol. 47(1-2), pages 59-86, March.
    27. Eleswarapu, Venkat R. & Thompson, Rex & Venkataraman, Kumar, 2004. "The Impact of Regulation Fair Disclosure: Trading Costs and Information Asymmetry," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 39(2), pages 209-225, June.
    28. Louis K. C. Chan & Jason Karceski & Josef Lakonishok, 2003. "The Level and Persistence of Growth Rates," Journal of Finance, American Finance Association, vol. 58(2), pages 643-684, April.
    29. Jacob, John & Lys, Thomas Z. & Neale, Margaret A., 1999. "Expertise in forecasting performance of security analysts," Journal of Accounting and Economics, Elsevier, vol. 28(1), pages 51-82, November.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Lambert, David & Matolcsy, Zoltan & Wyatt, Anne, 2015. "Analysts' earnings forecasts and technological conditions in the firm's investment environment," Journal of Contemporary Accounting and Economics, Elsevier, vol. 11(2), pages 104-120.
    2. Papastamos, Dimitrios & Matysiak, George & Stevenson, Simon, 2015. "Assessing the accuracy and dispersion of real estate investment forecasts," International Review of Financial Analysis, Elsevier, vol. 42(C), pages 141-152.
    3. Jing Wang & Wei Li & Arno Forst, 2021. "Product market competition, stock price informativeness, and IFRS adoption: evidence from Europe," Review of Quantitative Finance and Accounting, Springer, vol. 56(4), pages 1537-1559, May.
    4. Hyun Min Oh & Sam Bock Park & Jong Hyun Kim, 2020. "Do Analysts’ Cash Flow Forecasts Improve Firm Value?," IJFS, MDPI, vol. 8(4), pages 1-25, October.
    5. Esplin, Adam, 2022. "Industry-level versus firm-level forecasts of long-term earnings growth," Finance Research Letters, Elsevier, vol. 47(PA).
    6. Tetsuya Adachi & Takashi Asano & Tatsushi Okuda, 2016. "Simultaneous Estimation of Cost of Equity and Expected Earnings of Individual Firms with the Residual Income Model," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 34, pages 1-38, November.
    7. Yuan Yin & Ken Peasnell & Herbert G. Hunt, 2018. "How do sell-side analysts obtain price-earnings multiples to value firms?," Accounting and Business Research, Taylor & Francis Journals, vol. 48(1), pages 108-135, January.
    8. Chan, Jesse & Lin, Steve & Yu, Yong & Zhao, Wuyang, 2018. "Analysts’ stock ownership and stock recommendations," Journal of Accounting and Economics, Elsevier, vol. 66(2), pages 476-498.
    9. Peter F. Pope & Tong Wang, 2023. "Analyst ability and research effort: non-EPS forecast provision as a research quality signal," Review of Accounting Studies, Springer, vol. 28(3), pages 1263-1315, September.
    10. Peter Clarkson & Alexander Nekrasov & Andreas Simon & Irene Tutticci, 2020. "Target price forecasts: The roles of the 52‐week high price and recent investor sentiment," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 47(9-10), pages 1365-1399, October.
    11. Evan M. Eastman & Jianren Xu, 2021. "Market reactions to enterprise risk management adoption, incorporation by rating agencies, and ORSA Act passage," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 24(2), pages 151-180, June.
    12. Kenneth Peasnell & Yuan Yin & Martien Lubberink, 2018. "Analysts’ stock recommendations, earnings growth and risk," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 58(1), pages 217-254, March.
    13. Naresh Bansal & Jack Strauss & Alireza Nasseh, 2015. "Can we consistently forecast a firm’s earnings? Using combination forecast methods to predict the EPS of Dow firms," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 39(1), pages 1-22, January.
    14. repec:mth:ijafr8:v:8:y:2018:i:4:p:370-383 is not listed on IDEAS
    15. Balakrishnan, Karthik & Shivakumar, Lakshmanan & Taori, Peeyush, 2021. "Analysts’ estimates of the cost of equity capital," Journal of Accounting and Economics, Elsevier, vol. 71(2).
    16. Dimitrios Papastamos & George Matysiak & Simon Stevenson, 2014. "A Comparative Analysis of the Accuracy and Uncertainty in Real Estate and Macroeconomic Forecasts," Real Estate & Planning Working Papers rep-wp2014-06, Henley Business School, University of Reading.
    17. Jincheol Bae & Wonchang Hur & Jaehong Lee & Jaimin Goh, 2017. "Patent Citations and Financial Analysts’ Long-Term Growth Forecasts," Sustainability, MDPI, vol. 9(5), pages 1-15, May.
    18. Jochen Becker & Josip Medjedovic & Christoph Merkle, 2019. "The Effect of CEO Extraversion on Analyst Forecasts: Stereotypes and Similarity Bias," The Financial Review, Eastern Finance Association, vol. 54(1), pages 133-164, February.
    19. Akyol, Ali C. & Qian, Yiming & Yu, Frank, 2023. "How do experienced analysts improve price efficiency?," Journal of Banking & Finance, Elsevier, vol. 149(C).
    20. Hoechle, Daniel & Schaub, nic & Schmid, Markus, 2012. "Time Stamp Errors and the Stock Price Reaction to Analyst Recommendation and Forecast Revisions," Working Papers on Finance 1215, University of St. Gallen, School of Finance, revised Sep 2015.
    21. Papadaki, Aphroditi J. & Pavlopoulou-Lelaki, Olga-Chara, 2021. "Sources of Corporate Financing and Operating Performance: The effects of strategic ownership and financial restatements," International Review of Financial Analysis, Elsevier, vol. 76(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ramnath, Sundaresh & Rock, Steve & Shane, Philip, 2008. "The financial analyst forecasting literature: A taxonomy with suggestions for further research," International Journal of Forecasting, Elsevier, vol. 24(1), pages 34-75.
    2. Beyer, Anne & Cohen, Daniel A. & Lys, Thomas Z. & Walther, Beverly R., 2010. "The financial reporting environment: Review of the recent literature," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 296-343, December.
    3. Pandit, Shailendra & Willis, Richard H. & Zhou, Ling, 2012. "Security analysts, cash flow forecasts, and turnover," International Journal of Forecasting, Elsevier, vol. 28(4), pages 874-890.
    4. Mehran, Hamid & Stulz, Rene M., 2007. "The economics of conflicts of interest in financial institutions," Journal of Financial Economics, Elsevier, vol. 85(2), pages 267-296, August.
    5. Dambra, Michael & Field, Laura Casares & Gustafson, Matthew T. & Pisciotta, Kevin, 2018. "The consequences to analyst involvement in the IPO process: Evidence surrounding the JOBS Act," Journal of Accounting and Economics, Elsevier, vol. 65(2), pages 302-330.
    6. Horton, Joanne & Serafeim, George & Wu, Shan, 2017. "Career concerns of banking analysts," Journal of Accounting and Economics, Elsevier, vol. 63(2), pages 231-252.
    7. Mei-Chen Lin & J. Jimmy Yang, 2023. "Do lottery characteristics matter for analysts’ forecast behavior?," Review of Quantitative Finance and Accounting, Springer, vol. 61(3), pages 1057-1091, October.
    8. Sanghyuk Byun & Kristin Roland, 2021. "Analyst bias and forecast consistency," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(4), pages 5403-5437, December.
    9. Luong, Thanh Son & Qiu, Buhui & Wu, Yi (Ava), 2021. "Does it pay to be socially connected with wall street brokerages? Evidence from cost of equity," Journal of Corporate Finance, Elsevier, vol. 68(C).
    10. Anup Agrawal & Mark A. Chen, 2008. "Do Analyst Conflicts Matter? Evidence from Stock Recommendations," Journal of Law and Economics, University of Chicago Press, vol. 51(3), pages 503-537, August.
    11. Vadim S. Balashov & Zhanel B. DeVides, 2020. "Is Diversification A Job Safety Net For Sell‐Side Analysts?," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 43(3), pages 543-573, August.
    12. AltInkIlIç, Oya & Hansen, Robert S., 2009. "On the information role of stock recommendation revisions," Journal of Accounting and Economics, Elsevier, vol. 48(1), pages 17-36, October.
    13. Cowan, Arnold R. & Salotti, Valentina, 2020. "Anti-selective disclosure regulation and analyst forecast accuracy and usefulness," Journal of Corporate Finance, Elsevier, vol. 64(C).
    14. Francis, Bill & Hasan, Iftekhar & Liu, Liuling & Wu, Qiang & Zhao, Yijiang, 2021. "Financial analysts' career concerns and the cost of private debt," Journal of Corporate Finance, Elsevier, vol. 67(C).
    15. Yi Dong & Nan Hu & Xu Li & Ling Liu, 2017. "Analyst Firm Coverage and Forecast Accuracy: The Effect of Regulation Fair Disclosure," Abacus, Accounting Foundation, University of Sydney, vol. 53(4), pages 450-484, December.
    16. Bok Baik & Kyonghee Kim & Richard Morton & Yongoh Roh, 2016. "Analysts’ pre-tax income forecasts and the tax expense anomaly," Review of Accounting Studies, Springer, vol. 21(2), pages 559-595, June.
    17. Truc (Peter) Thuc Do & Huai Zhang, 2020. "Peer Effects among Financial Analysts," Contemporary Accounting Research, John Wiley & Sons, vol. 37(1), pages 358-391, March.
    18. Prem G. Mathew & H. Semih Yildirim, 2015. "Does director affiliation lead to analyst bias?," Applied Economics, Taylor & Francis Journals, vol. 47(3), pages 272-287, January.
    19. Rees, Lynn & Sharp, Nathan Y. & Wong, Paul A., 2017. "Working on the weekend: Do analysts strategically time the release of their recommendation revisions?," Journal of Corporate Finance, Elsevier, vol. 45(C), pages 104-121.
    20. Danling Jiang & Alok Kumar & Kelvin K. F. Law, 2016. "Political contributions and analyst behavior," Review of Accounting Studies, Springer, vol. 21(1), pages 37-88, March.

    More about this item

    Keywords

    Financial analysts; Long-term growth; Analysts' forecasts; Analysts' career outcomes; Value-relevance; Stock recommendations;
    All these keywords.

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jaecon:v:53:y:2012:i:1:p:55-76. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jae .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.