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Learning and incentive: A study on analyst response to pension underfunding

Author

Listed:
  • Chen, Xuanjuan
  • Yao, Tong
  • Yu, Tong
  • Zhang, Ting

Abstract

There is a long-standing debate on whether sell-side analysts learn from their experience to improve earnings forecast skills. This study shows that incentive is an important factor for understanding the “learning by doing” effect by analysts. We examine analysts’ response to a complex type of information – corporate pension underfunding. Pension underfunding negatively impacts future earnings and analysts on average underreact to such information in their earnings forecasts. More importantly, when there is a strong incentive for analysts to deliver accurate forecasts, analyst learning effectively reduces their underreaction to pension underfunding information. On the other hand, when such an incentive is absent, the analyst learning effect is not discernible in the data. Further evidence suggests that analyst learning and incentive jointly reduce stock market mispricing associated with corporate pension underfunding.

Suggested Citation

  • Chen, Xuanjuan & Yao, Tong & Yu, Tong & Zhang, Ting, 2014. "Learning and incentive: A study on analyst response to pension underfunding," Journal of Banking & Finance, Elsevier, vol. 45(C), pages 26-42.
  • Handle: RePEc:eee:jbfina:v:45:y:2014:i:c:p:26-42
    DOI: 10.1016/j.jbankfin.2014.04.001
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    More about this item

    Keywords

    Analyst learning; Incentive; Pension underfunding; Earnings forecast error;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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