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theses

This dissertation consists of three interrelated essays that examine the determinants and consequences of the efficiency of information dissemination in security markets.

In the first essay, a new measure of investors’ divergence of opinion derived from analysts’ conditional forecasts revisions is constructed and the relationship between divergence of opinion and M&A-related target characteristics is analyzed. The new measure of divergence of opinion is negatively associated with takeover likelihood, positively associated with takeover completion likelihood, and positively associated with target abnormal announcement returns. The evidence also suggests that this new measure has more informational content and is a more efficient predictor compared with three other traditional measures of divergence of opinion in predicting M&A characteristics. Finally, the evidence suggests that the cumulative target abnormal announcement return contains a value-creating component that dominates its takeover premium component.

The second essay explores characteristics of financial analysts who deliver more consistent forecast errors. First, by showing that analyst forecast consistency mitigates the “walk-down” pattern, we demonstrate that consistent analysts use earnings forecasts both to provide value-related information and to achieve alternative personal goals. Second, by showing that analyst forecast consistency increases the relationship between stock valuations and stock recommendations, we demonstrate that consistency increases the forecast-recommendation translational effectiveness. Third, by showing that analyst forecast consistency increases the relationship between forecasts and short-term market returns but decreases the relationship between recommendations and short-term market returns, we demonstrate that consistent analysts allocate more information to forecasts than to recommendations. Finally, we find that analyst forecast consistency increases in firms’ information environment, analysts’ ability, analysts’ voluntary supplementary-information seeking behavior and decreases in analysts’ voluntary redundant-information seeking behavior and risk-related-information seeking behavior. We conclude that consistent analysts rely more on forecasts than on recommendations to serve investors’ needs for earnings information and analysts’ own personal needs, such as increasing trade volume, generating investment banking business, and currying favor with managers. Once forecasts are made, the forecast-recommendation translational process is less contaminated by incentives other than providing value-related information.

The third essay examines the relationship between the informativeness of financial analysts’ stock recommendations and earnings forecasts and firms’ brand capital intensity. Because brand assets are generally not capitalized and are more difficult to evaluate, analysts’ recommendations and forecasts for firms with higher brand capital intensity are expected to convey more information about firms’ value. As predicted, the results suggest that (1) analysts discuss more topics related to brand capital in their reports for firms with higher brand capital intensity, (2) the short-term market reactions to recommendations and forecasts are significantly higher for firms with higher brand capital intensity, (3) calendar-time portfolios based on analysts’ recommendations earn significantly greater abnormal returns for firms with higher brand capital intensity and (4) short-term market reactions to recommendations and forecasts are significantly positively related to brand capital intensity. In addition, the relationship is stronger when market news sentiment is more extreme. The relationship is also stronger when market news sentiment conflicts with forecast revisions but is indifferent when it conflicts with recommendation revisions. Furthermore, revision frequency and forecast accuracy decrease in brand capital intensity. These findings indicate that analysts expend more effort in evaluating brand capital and their stock recommendations and earnings forecasts are more valuable for firms with higher brand capital intensity.

ETD_10644

doi:10.7282/t3-pnj8-2s37

Ph.D.

Includes bibliographical references

ETD doctoral

The author owns the copyright to this work.