Yonca Ertimur

Measure for Measure: The Relation between Forecast Accuracy and Recommendation Profitability of Analysts

We examine the contemporaneous relation between earnings forecast accuracy and recommendation profitability to assess the effectiveness with which analysts translate forecasts into profitable recommendations. We find that, after controlling for expertise, more accurate analysts make more profitable recommendations, albeit only for firms with value-relevant earnings. Next, we show that conflicts of interest from investment banking activities affect the relation between accuracy and profitability. In the case of buy recommendations, more accurate forecasts are associated with more profitable recommendations only for the nonconflicted analysts. For hold recommendations, higher levels of accuracy are associated with higher levels of profitability for conflicted analysts, provided these recommendations are treated as sells. Finally, we find that regulatory reforms aimed at mitigating analyst conflicts of interest appear to have improved the relation between accuracy and profitability. Specifically, the integrity of buy and hold recommendations has improved and the change is more pronounced for analysts expected to be most conflicted.

Shareholder Votes and Proxy Advisors: Evidence from Say on Pay: SHAREHOLDER VOTES AND PROXY ADVISORS

We study the role of proxy advisors (ISS and Glass Lewis & Co.) in the context of mandatory “say on pay” votes, a novel and complex item requiring significant firm-specific analysis. After describing the analysis underlying each proxy advisor’s recommendations, we examine the effect of these recommendations on shareholder votes, stock prices and firms’ behavior. As in prior studies, negative recommendations have a strong association with voting outcomes, but the effect varies with the reasons behind the recommendation. We document a small but significantly negative market reaction to the release of negative recommendations. More than one third of the firms receiving a negative recommendation publicly question the proxy advisors’ methodologies, but this protest has no effect on the recommendation and the voting outcome. The few firms that change their compensation practices obtain a revision in the recommendation and avoid voting dissent. We also present novel evidence on the (substantial) influence of management recommendations on shareholder votes in the context of the “say when on pay” vote, i.e. the vote on whether to hold say on pay votes every one, two or three years. Our findings contribute to the literature on shareholder voting and the related policy debate. JEL Classification: G34, G38, J33, M12

Bridging the Gap: Evidence from Externally Hired CEOs: BRIDGING THE GAP: EVIDENCE FROM EXTERNALLY HIRED CEOS

External CEOs often experience an employment gap (i.e., a period during which they do not hold an executive position at a public company) prior to joining their new firm. These gaps cannot be accurately identified in common databases. A hand-collected sample of 50 randomly selected new CEOs indicates that approximately half of new CEOs are external hires. These new CEOs experience mean (median) gaps of 2.26 (1.65) years. We hypothesize that labor market frictions and executive skillsets contribute to the existence and length of these executive employment gaps. We also use theories from labor economics to predict (equilibrium) associations between two measures of “fit” (executive compensation and long-term match quality) and gaps (both existence and length). Finally, we will provide descriptive evidence on what executives do (e.g., sit on public company boards, work for private consulting companies, teach, consume leisure) during their gaps.

Confirming or Conflicting Sales and Earnings Signals

This study examines market reactions to the preliminary earnings announcements of companies, when the announcements provide confirming or conflicting signals about sales and profit growth. Consistent with intuition, the authors show that when the signals are positive and confirming, i.e., when both sales and profits increase substantially, the market reaction is positive and significantly different from zero. Similarly, when the signals are negative and confirming, i.e., both sales and profits decline or grow slowly, the market reaction is negative and significantly different from zero. The authors then explore the market reactions when the sales and earnings signals conflict. When sales decline or grow slowly but profits grow substantially, the market reaction is different for value and growth firms. The market reaction of value firms is positive and statistically different from zero, indicating that market participants favor value companies that are able to control expenses even when they are facing a decline or slow growth in sales. Market participants react negatively, however, to growth companies that report a decline or slow growth in sales even if profits grow significantly. The authors do not find any clear differences between value and growth firms for the conflicting signals of high growth in sales but low growth in earnings.

When and Why Do IPO Firms Manage Earnings

Abstract There is significant disagreement about whether, when, and why IPO firms manage earnings. We precisely identify the timing and motives behind earnings management by IPO firms. The period around an IPO is characterized by two events: the IPO itself and the lockup expiration. Both the raising of capital at the IPO and the exit by pre-IPO shareholders at lockup expiration create incentives for firms to manage earnings. To disentangle the effect of these events, we examine quarterly, rather than annual, abnormal accruals. We find no evidence of income-increasing earnings management before the IPO. However, IPO firms exhibit positive abnormal accruals in the quarter before and the quarter of the lockup expiration. Positive abnormal accruals are concentrated in less scrutinized firms and firms with high selling by pre-IPO shareholders. Moreover, we find that these accruals subsequently reverse and that such reversals contribute to long-run IPO underperformance.

Financial Analysts and Their Contribution to Well-Functioning Capital Markets

Well-functioning capital markets rely on a complex set of institutions and participants that ensure capital is allocated to its best possible use, and that information flows between firms receiving capital and the investors who provide it. In this manuscript, we endeavor to understand whether, how, and under what circumstances sell-side research contributes to the functioning of capital markets. We review major findings in the literature, address significant regulatory and technological changes, and offer suggestions for future research.

Financial Reporting for Pollution Reduction Programs

We develop a conceptually grounded approach, based on the International Accounting Standards Board’s conceptual framework, to the accounting for the rights and obligations embodied in a cap-and-tra...