Emre Unlu

The Predictive Content of Aggregate Analyst Recommendations

Using more than 350,000 sell-side analyst recommendations from January 1994 to August 2006, this paper examines the predictive content of aggregate analyst recommendations. We find that changes in aggregate analyst recommendations forecast future market excess returns after controlling for macroeconomic variables that have been shown to influence market returns. Similarly, changes in industry-aggregated analyst recommendations predict future industry returns. Changes in aggregate analyst recommendations also predict one-quarter-ahead aggregate earnings growth. Overall, our results suggest that analyst recommendations contain market- and industry-level information about future returns and earnings.

Do Security Analysts Reduce Noise

This study investigates the role of security analysts in reducing noise in stock price fluctuations. Using a sample of analyst coverage initiations between 1984 and 2006, the study finds that (1) noise is significantly reduced in the year following the initiation and (2) the extent of the noise reduction is a function of the intensity of analyst coverage during the initiation year. The results suggest that analyst coverage makes stock prices less noisy. Analysts’ noise-reducing ability can have positive consequences for the performance of corporate and portfolio managers who rely on forecasting to make long-term financial decisions. Much of the stock price fluctuations we observe on a daily basis are, to a large degree, unrelated to company fundamentals. This excess volatility comes at a great cost to market participants because it introduces additional uncertainty about future cash flows. In this article, we try to explain why stock prices fluctuate more often and more widely than company fundamentals would suggest. In particular, we examine whether the presence of security analysts makes prices more informative (i.e., less noisy). We focus on analysts because of their influence on a large number of investors and their advantage over uninformed investors in terms of experience and training. We hypothesize that analyst coverage helps investors gauge the informational content of company-specific news and reduce the proportion of noise-motivated trades. Our study finds evidence consistent with this hypothesis. We find that residual volatility declines significantly in the year following analyst initiation. We also find that the reduction in noise is directly related to the intensity of analyst coverage. That is, the larger the increase in recommendations or revisions on a stock during initiation, the larger the noise reduction. We also find that analysts’ ability to reduce noise in price fluctuations was diminished during the 1998–2000 TMT (technology, media, and telecommunications) bubble and that this reduction was more pronounced for tech stocks. This reduction might have occurred for two reasons. First, the increase in cash flow volatility and the proportion of intangibles in total assets might have temporarily undermined the effectiveness of fundamental analysis. Second, investor optimism and overconfidence during this period was high; in such an environment, investors are more likely to rely on sentiment than on the advice of informed parties, such as analysts. Our results confirm traditional views of the role of analyst research as an instrument for investors to better understand the informational content of company-specific news. On a large scale, the noise-reducing ability of analysts can have important consequences for price and capital allocation efficiency. More efficient prices are more informative and allow for more accurate forecasting, which benefits corporate decision makers and investors. For corporations, seeking analyst coverage for their stocks can improve forecasting ability and reduce business risk. For an individual investor or portfolio manager, incorporating stocks covered by analysts into portfolios can reduce the uncertainty of future portfolio returns and help avoid future economic losses.

It Takes Two: The Incidence and Effectiveness of Co‐CEOs

This study examines the phenomenon of co‐CEOs within publicly traded firms. Although shared executive leadership is not widespread, it occurs within some very prominent firms. We find that co‐CEOs generally complement each other in terms of educational background or executive responsibilities. Our results show that firms most likely to appoint co‐CEOs have lower leverage, a more limited firm focus, less independent board structure, fewer advising directors, lower institutional ownership, and greater levels of merger activity. The governance structure of co‐CEO firms suggests that co‐CEOships can serve as an alternative governance mechanism, with co‐CEO mutual monitoring substituting for board or external monitoring and co‐CEO complementary skills substituting for board advising. An event study indicates that the market reacts positively to appointments of co‐CEOs while a propensity score analysis shows that the presence of co‐CEOs increases firm valuation.

The More, the Merrier: An International Analysis of the Frequency of Dividend Payment

The joint contributions of prospect theory and mental accounting imply that investors receive a higher utility when a given level of dividends is paid more frequently, suggesting that dividends should be paid as often as possible. We document a strong positive relationship between payment frequency and firm value, confirmed with an event study of dividend payment frequency changes. Upon examining the frequency with which dividends are paid around the world, we discover that considerable variation exists, and that dividends are not paid as often as behavioral aspects suggest they should. From our multivariate analysis, we determine that non-behavioral factors such as the legal regime as well as the level and standard deviation of operating income exert significant influences on the payment frequency of dividends, suggesting that a tradeoff exists between behavioral and non-behavioral factors. The relationship between payment frequency and firm value remains robust in the presence of these non-behavioral factors. Copyright (c) 2009 The Authors Journal compilation (c) 2009 Blackwell Publishing Ltd.

Does the Variability of Other Comprehensive Income (OCI) Play a Role in the Determination of Cost of Debt, Capital Structure and Credit Ratings?

We examine the usefulness of other comprehensive income (OCI) to debt investors in nonfinancial companies. Motivated by Merton’s (1974) real options framework, we construct a measure of incremental OCI volatility, designed to capture the effect of OCI on overall firm asset volatility, which is a primary driver of credit risk in Merton’s (1974) model. We find that the volatility of incremental OCI influences the likelihood of default, credit ratings, and the cost of debt. Overall, our evidence suggests that creditors use information from OCI in their assessment of firm credit risk and in pricing debt contracts.