Edward P. Swanson

Should Investors Follow the Prophets or the Bears? Evidence on the Use of Public Information by Analysts and Short Sellers

We investigate whether shorts and analysts differ in their use of fundamental and other information that is predictive of future returns. Remarkably, open short interest is significantly associated in the expected direction with all eleven variables examined. In contrast, analysts tend to positively recommend stocks with high growth, high accruals, and low book-to-market ratios -- despite these variables having a negative association with future returns. These results suggest that short sellers can serve as an alternative information intermediary for investors. We then investigate the profitability of using short interest in trading. We find abnormal returns (1.11 percent per month) from a zero-investment strategy that 1) shorts firms with highly favorable analyst recommendations (buy signal) but high short interest (sell signal), and 2) buys firms with highly unfavorable analyst recommendations (sell signal) but low short interest (buy signal). Short interest, therefore, captures predictive information that can be used by investors in trading against analysts’ recommendations to increase returns.

The Influence of Culture and Corporate Governance on the Characteristics that Distinguish Superior Analysts

We identify characteristics of financial analysts that have been shown to be associated with relative forecast accuracy in the United States and examine these characteristics within 10 countries. We find that relative forecast accuracy is influenced by years of experience, size of the analysts employer, and frequency of forecast issuance for many of these countries and show that the significance of experience and employer is conditional on the type of culture and corporate governance of the country.

Loan, security, and dividend choices by individual (unconsolidated) public and private commercial banks

Using call report data, we consider whether the discretionary portion of loan loss provisions, loan charge-offs, securities gains and losses, and dividends are influenced by the banks level of capital, earnings, and taxes. We studied more than 11,000 banks. We find that banks below a capital adequacy threshold often make discretionary choices that reduce earnings and capital. Banks above the threshold exhibit different discretionary outcomes, with evidence of income smoothing and tax-advantaged actions.

Do Corporate Managers Trade Against Short Sellers

Motivated by the significant capital allocated to repurchasing stock and its potential affect on price discovery, we develop an empirical model of changes in corporate stock repurchases. We find that share price, capital availability, dividend policy, firm size, and operating profitability significantly influence quarterly stock repurchases, but our novel discovery is that managers trade against shorts by increasing (decreasing) repurchases in response to an increase (decrease) in short sales. This practice appears to violate SEC regulations that stock price be set by “independent market forces without undue influence by the issuer.” We also empirically model insider trading, finding that insiders buy and sell with the shorts, with little attention to the amount of shares being repurchased. Managers therefore trade with shorts when using their personal capital, but against them with corporate capital.