Lynn L. Rees

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.

A comparison of investors' abilities to assimilate U.S. GAAP disclosures☆

Abstract Differences between generally accepted accounting principles (GAAP) in the United States (U.S.) and accounting principles followed by other countries are required to be disclosed in the annual report filed with the U.S. Securities and Exchange Commission (SEC). The costs to convert to U.S. GAAP for a large multinational company are substantial, and the SEC has been heavily criticized for not permitting non-U.S. companies to exclusively follow their domestic GAAP. This study employs the U.S. GAAP earnings reconciliation to test the notion that investors across countries use different sets of accounting information to value securities or place different emphases on items within the same information set. Specifically, the relative importance of the reconciliation to U.S. and non-U.S. investors is analyzed.

The Relative Accuracy of Analysts’ Published Forecasts Versus Whisper Forecasts Surrounding the Adoption of Regulation FD

Abstract This paper examines the accuracy and information content of analysts’ published forecasts relative to whisper forecasts before and after the effective date of Regulation Fair Disclosure (Reg FD). We find that whisper forecasts are generally more accurate than analysts’ consensus forecasts in our pre-Reg FD period (consistent with prior literature), but less accurate during the post-Reg FD period. We also find in the post-Reg FD period that analysts’ forecast errors earn significantly larger abnormal returns compared to whisper forecast errors. These results suggest that Reg FD has had its desired effect of mitigating private communications from management to market participants.

The usefulness to individual and institutional investors of annual earnings announcements and SEC filings by non-U.S. companies

This study examines the usefulness and the speed in processing of annual earnings announcements and SEC filings by non-U.S. companies listed on either the New York or American Stock Exchange. Intraday trading data and a methodology developed in Cready (1988) and Cready and Mynatt (1991) are utilized to determine if the above characteristics are related to investor wealth. The results indicate that annual earnings announcements of non-U.S. companies are useful to both institutional and individual investors. With respect to the SEC filings, no unexpected trading activity was detected surrounding the filing dates for the entire sample period (1983-1992) for either institutional or individual investors. However, when the sample was restricted to post-1988 filings, which corresponds to a dramatic rise in the market value of non-U.S. equity securities listed in the U.S., the information in the SEC filings was found to be useful to both institutional and individual investors. Finally, for both the earnings announcements and the post-1988 SEC filings, institutional investors appear to process the information more quickly than do individual investors, and the value of the the information increases with investor wealth.

Working on the Weekend: Do Analysts Strategically Time the Release of Their Recommendation Revisions?

We examine whether financial analysts strategically time the announcement of their recommendation revisions consistent with their incentives to maintain relations with management. We provide evidence that investor and media attention to recommendation revisions is reduced on weekends, which analysts can exploit to strategically time the release of their revisions. We find that downgrades are a higher proportion of weekend revisions than weekday revisions and that analysts with characteristics that suggest they possess the strongest incentives to maintain favor with management are more likely to downgrade on the weekend. In contrast, analysts absent these characteristics are more likely to release downgrades during the week, consistent with these analysts being driven primarily by other incentives, such as the timely release of their recommendation and garnering media attention. We also present evidence suggesting that strategic disclosure of recommendation downgrades is associated with greater access to management on public earnings conference calls.

An Examination of First Call's Company Issued Guidance Database

Abstract This paper examines the accuracy and consistency of coding variables in the Company Issued Guidance (CIG) database issued by First Call. Specifically, we examine “CIG Code” – a variable used by First Call to describe the type of guidance issued by management (point, range, or qualitative), and “CIG Description Code” – a variable indicating the direction of the earnings guidance (positive, negative, or neutral). Our examination reveals extensive misclassification errors for these variables. In particular, the errors for CIG description code are of such a magnitude that we recommend researchers not to rely on this variable when employing the First Calls CIG database.

Realized benefits from foreign listings

Abstract This study examines a sample of U.S. companies that listed their equity securities on a foreign exchange. Perceived benefits from the foreign listing, as reported by management, are summarized. Company performance surrounding the listing is analyzed using both stock market and accounting measures to determine whether the anticipated benefits are consistently realized. The stock price reaction within a short window surrounding the initial public announcement of the foreign listing is not significantly different from zero. However, some evidence is documented that indicates the net benefits from listing internationally is positive. Cross-sectional analyses provide evidence consistent with the notion that the markets reaction to the listing event is positively related to liquidity gains derived from the listing and the firms ability to expand operations within the foreign market. This evidence implies that the ultimate benefits received from the foreign listing depend on the position of the firm and its ability to capitalize on market conditions.

Equity Return Performance from a Prediction Model of Meeting or Missing Analysts’ Forecasts

This article develops a trading strategy based on a prediction model as to whether firms will meet their analyst forecasts for the next two quarters. The author shows that a predictionmodel applied to quarterly data in a recent time period is profitable. In fact, hedge returns are positive for every calendar quarter from the third quarter of 2003 to the last quarter of 2007. Strikingly, the average return magnitude for the entire sample is about 17-23%, depending on the return metric used and the investment horizon (three or six months). This magnitude is similar to a return strategy with perfect foresight as to whether the firm will meet future forecasts, although the model is not perfect in its predictions. Further analysis reveals that this result is due to firms realizing significantly greater returns in the higher-probability deciles relative to the lower deciles, regardless of whether the firm ultimately met its future forecasts. Thus, it appears that the model provides information as to not only the likelihood of the firm meeting its earnings targets, but also how the market is likely to interpret this event at the time it occurs.