Wie wertvoll sind Analysten?

Neue Erkenntnisse aus dem Bereich empirischer

Kapitalmarktforschung

DVFA Kongress

PD Dr. Alexander Kerl, CFA

1

Outline of presentation

Part I

Analysts and conflicts of interests: general introduction and empirical findings

Part II

Analysts and the corporate governance environment: empirical findings

Part III

Analysts and European mutual fund trading: empirical findings

2PD Dr. Alexander Kerl, CFA DVFA Kongress

Part I

Part I

Analysts and conflicts of interests: general introduction and empirical findings

Part II

Analysts and the corporate governance environment: empirical findings

Part III

Analysts and European mutual fund trading: empirical findings

3PD Dr. Alexander Kerl, CFA DVFA Kongress

Distribution of stock recommendations

Source: Barber et al. (2006) Journal of Accounting and Economics 41, 87-117.

PD Dr. Alexander Kerl, CFA DVFA Kongress 4

NYSE rule 472

&

NASD rule 2711

Global Research Settlement and further regulation

DVFA Kongress 5PD Dr. Alexander Kerl, CFA

» 1990s: mainly positive

recommendations and

increasing earnings forecasts

» Continuous increase in

forecasts continued despite

the burst of the dot.com

bubble

» News Yorks‘ state attorney

turned against positive

forecasts

» 2002: $1.4 bn compromise

settlement with 10 leading

investment banks

Eliot Spitzer vs. investment banks

» Introduction of chinese

walls

» Adjustment of analyst

compensation + attendence

of road shows in only very

restrictive occasions

» Purchase of additional

independent research

» Further transparency by

disclosure requirements of

recommendations and

conflicts of interests

Settlement agreements

NYSE Rule 472(k)(1)

PD Dr. Alexander Kerl, CFA DVFA Kongress 6

List of potential conflicts of interests

PD Dr. Alexander Kerl, CFA DVFA Kongress 7

Ownership

Market

makerDirector

Non IB-

Services IB-Services• Client relationship

• Compensation

• IPO / offering

Research project 1: Sell-side analyst research and

reported conflicts of interest

No. of companies

by CoI_Score

No. of occurences

per category

» Classification of individual

conflicts into 4 (+1) categories

that are mutually exclusive

IB_Client non_IB_Client

MktMakerHold_1pct

Other

Individual conflict categories

CoI_Score є {0, 1, 2, 3, 4, 5}

PD Dr. Alexander Kerl, CFA DVFA Kongress 8

Descriptive statistics: recommendation

Recommendation seems to also increase in

number of conflicts…

PD Dr. Alexander Kerl, CFA DVFA Kongress 9

1

1,2

1,4

1,6

1,8

2

2,2

2,4

2,6

2,8

3

0 1 2 3 4 5

∅2.4

Recommendation

statistic by CoI_Score

% Sell

% Buy0,0%

10,0%

20,0%

30,0%

40,0%

50,0%

60,0%

% Sell % Hold % Buy

Rating distribution across

recommendation and conflict type

… and is more optimistic for every

individual type of conflict vs. no conflict at all

Part II

Part I

Analysts and conflicts of interests: general introduction and empirical findings

Part II

Analysts and the corporate governance environment: empirical findings

Part III

Analysts and European mutual fund trading: empirical findings

10PD Dr. Alexander Kerl, CFA DVFA Kongress

Research project 2: Analysts‘ forecasts and the quality

of financial disclosures

DVFA Kongress 11PD Dr. Alexander Kerl, CFA

» Analysts‘ forecasts are

informative when

other information is

scarce

versus

» Forecasts are most

informative in case of

high-quality financial

information

HypothesesMeasurement of

information value

» Information value of

research measured by

market reaction

» Information value of

research measured by

forecast error of

earnings and target

prices

Regulation measures

» Common vs. civil law

country

» Anti-self dealing index

» Public enforcement

index

» Staff enforcement

index

� A higher measures

reveals a higher level of

investor protection

Information value of analyst research (i.e. market

reaction)

Positive signals

Upgrade

EPS_forecast (increase)

TP (increase)

Negative signals

Downgrade

EPS_forecast (decrease)

TP (decrease)

DVFA Kongress 12PD Dr. Alexander Kerl, CFA

Low regulation countries High regulation countries

Stock price reaction around report publication (CAR[-2,+2])

N° of observations / R2 628,361 / 11.9%

Stronger stock price reaction in ‘high regulation countries’ (� higher information value)

Dependent variable

Information value of analyst research (i.e. forecast

error)

Regulation measure

Common law country

Anti-self dealing index

Public enforcement index

Staff enforcement index

N° of observations / R2 410,886 / 15.7%

DVFA Kongress 13PD Dr. Alexander Kerl, CFA

EPS error Target price error

Forecast error

Lower forecast error in ‘high regulation countries’ (� higher information value)

Dependent variable

Part III

Part I

Analysts and conflicts of interests: general introduction and empirical findings

Part II

Analysts and the corporate governance environment: empirical findings

Part III

Analysts and European mutual fund trading: empirical findings

14PD Dr. Alexander Kerl, CFA DVFA Kongress

Research project 3: Analyst forecasts and European

mutual fund trading

DVFA Kongress 15PD Dr. Alexander Kerl, CFA

» Most mutual fund companies are

too small to offer comprehensive

buy-side analysis

» Specialization effects of external

analysts

» Reference to prudent investment

guidelines

Reasons for using sell-side information

» LionShare from FactSet

» Semi-annual portfolio holdings of

4,300 European mutual funds

» Time period: 2005 to 2009

» Almost 1.2 mio active trades

» Analyst information from 5,000

stocks (from US, Japan, UK,

Germany, France, Italy, Spain,

Switzerland)

Database

Mutual fund manager follow research

Forecast measure

Cons. recommendation revision

Cons. EPS revision

Cons. target price revision

N° of observations / R2 1,155,713 / 2.5%

DVFA Kongress 16PD Dr. Alexander Kerl, CFA

Mutul fund

% holding change

All analyst forecast measures positively influence the trading behavior of mutual funds

Further analyses show that following sell-side research is beneficial

Dependent variableEspecially strong results:

» For positive forecast

changes

» With increasing

number of inputs

» If analysts opinion

deviates less

Conclusion

DVFA Kongress 17PD Dr. Alexander Kerl, CFA

» Regulation efforts due

to optimistic forecasts

» Forecasts still seem to

be biased

» Forecast optimism

increases in number of

prevailing conflicts

Forecasts & conflicts of

interest

Forecasts & corporate

governance

» Information value of

forecasts seems higher

in countries with

stronger investor

protection & higher

regulation

» This could be due to

higher quality of firm

disclosure which is

beneficial for analysts’

forecast quality

Impact on mutual fund

trading

» Mutual fund

managers make use of

external sell-side

information

» This behavior seems

beneficial since trades

in line with prior

forecasts outperform

trades that are

contrary to forecasts

18PD Dr. Alexander Kerl, CFA DVFA Kongress

Thanks for your attention!

Alexander.Kerl@wirtschaft.uni-giessen.de