Andreas Höfer

Do key investor information documents enhance retail investors’ understanding of financial products? Empirical evidence

Purpose - – The purpose of this paper is to analyze whether key investor information documents (KIDs) provided by suppliers/issuers help retail investors to understand the key characteristics of financial products. KIDs are fact sheets composed to describe the characteristics of financial products in a brief, standardized and straightforward manner. Design/methodology/approach - – In the empirical analysis, the authors evaluate different versions of KIDs and examine whether they meet minimum requirements to provide benefits for consumers. Findings - – The empirical results suggest that subjects assess KIDs of suppliers/issuers merely as moderately appropriate to grasp the key characteristics of financial products. In contrast, neutral benchmark KIDs are generally evaluated as being superior to those of suppliers/issuers, which at best meet current legal requirements. Originality/value - – The authors argue that a major reason for these findings is consumer policy’s assumption of omnicompetent subjects in line with the neoclassical idea of a

Does Experience Affect Security Analysts’ Accuracy? Empirical Evidence

Sell-side security analysts are considered as financial intermediaries who process, transform and transfer information in order to enable investors to make appropriate investment decisions. Prior research provides mixed evidence on the effect of experience on analysts’ accuracy. In this paper we empirically analyze the forecast accuracy of analysts from 2003 to 2012 using data from the Thomson Reuters I/B/E/S database. Utilizing both cross-sectional and panel analysis we find significant evidence that analysts become more accurate as they accumulate firm-specific experience. Being aware of this finding, investors should use analysts experience as a signal and put more weight on forecasts issued by these analysts. We argue that experienced analysts produce more precise forecasts because they have superior knowledge on financial markets, corporate finance and the regulatory framework (professional competences) and are more able to build up ties with the decision makers of the firms to be evaluated to gain additional firm-specific insights and collect non-publicly available information (social competences).

Analyst Recommendations and Regulation: Scopes for European Policy Makers to Enhance Investor Protection

Investors rely on analyst recommendations when making investment decisions. Over the last few years, however, sell-side analysts have caught the attention of the supervisory authorities given their vulnerability to numerous conflicts of interest. In this paper, we empirically examine relevant regulatory measures that have an impact upon analysts’ activities, namely the market abuse directive and markets in financial instruments directive. We find that European regulators have primarily focused on mitigating conflicts of interest. However, to establish an environment of more sophisticated investor protection additional regulatory effort is required. Therefore, in this paper, we provide related empirical evidence and discuss proposals to correct regulatory shortcomings in order to strengthen investor protection in the European Union.

Do mutual fund ratings provide valuable information for retail investors

Purpose Retail investors use information provided by mutual fund rating agencies to make investment decisions. This paper aims to examine whether the ratings provide useful information to retail investors by analyzing the rating migration and closure risk of mutual funds that received Morningstar’s mutual fund ratings from 2005 to 2012. Design/methodology/approach The research design differentiates between buy-and-hold investment strategies and dynamic investment strategies. To assess the information content of mutual fund ratings for buy-and-hold investment strategies, the rating migration based on the first and the last mutual fund rating during two-, four-, six- and eight-year horizons is determined. With respect to dynamic investment strategies, the number of rating changes per fund on a monthly basis during these time horizons is calculated. Findings Mutual fund rating persistence is low or even inexistent, in particular, during longer time periods. Only for lower-rated funds, the rating appears to indicate higher risk of fund closure. In addition, mutual funds face a large number of up to 38 monthly rating changes in the eight-year window. Originality/value Mutual fund rating persistence has hardly been analyzed for funds offered to retail investors so far. This paper clearly points out that because of the extensive rating migration and the high number of monthly rating changes, retail investors barely benefit from using mutual fund ratings.