Using a large database of analysts' target prices, we examine short-term market reactions to target price announcements and long-term co-movement of target and stock prices. We find a significant market reaction to the information contained in analysts' target prices, both unconditional and conditional on contemporaneously issued stock recommendations and earnings forecast revisions. For example, the spread in average announcement day abnormal returns between positive and negative target price revisions is as high as 7 percent. We also find that stock recommendations and earnings forecast revisions are informative controlling for the information in target prices. Using a cointegration approach, we explore the long-term behavior of market and target prices and estimate the system's long-term equilibrium. In this equilibrium a typical firm's one-year ahead target price is 22 percent higher than its current market price. Finally, while market prices react to the information conveyed in analysts' reports, we show that any subsequent corrections towards the long-term equilibrium are, in effect, done by analysts alone.

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Recent articles in the popular press suggest that managers are placing greater emphasis on meeting or exceeding analysts ’ expectations. 1 Consistent with this, empirical research provides evidence that firms manage both earnings and earnings forecasts in order to report earnings that meet or exceed analysts ’ expectations (Burgstahler and Dichev, 1997; Brown, 1998; Burgstahler and Eames 1998;

We examine whether the asymmetrical price response to bad and good earnings shocks changes as the relative level of the market changes. The study is based on a sample of 24,108 announcements of firms ’ annual earnings during the period 1988 to 1998. The level of the market is a relative measure based on the difference between the market P/E at the end of the announcement month and the average market P/E over the prior 12 months. Predictions based on behavioral finance models and extended regime-shifting models suggest that stock prices should respond more strongly to negative news as the relative market level rises. Similarly, prices should respond more strongly to good news in bad times, although the effect should be somewhat attenuated if the regime-shifting models are descriptively valid. The findings generally support these predictions.

We present and test hypotheses about how the components of compensation influence earnings management behavior. Hypotheses are based, in part, on the observation that discretion over accounting accruals gives managers a potentially valuable timing option that will lead to strategies for maximizing their compensation. Our empirical analysis shows that earnings management intensity, as measured by the absolute value of discretionary current accruals scaled by asset size, is related to managerial compensation contract design. We find the amounts of stock options and bonuses, and the incentive intensity of stock options, are positively related to earnings management intensity, whereas salaries are negatively related. Results do not reliably support either positive or negative effects of long-term incentive plans or restricted stock compensation on earnings management intensity, aside from the incentive intensity effect of restricted stock. We show that magnitudes of the effects of some compensation variables on earnings management intensity are conditional on proximity of premanaged earnings to specified targets. The importance of our findings is the strong evidence they provide that compensation contract design does influence earnings management, and that the influences of the various compensation components appear to be largely predictable on a presumption that (at least some) managers behave opportunistically.

INTRODUCTION A lack of transparency in financial reports has often been cited as a weakness of capital markets. Numerous revelations of financial reporting shenanigans by publicly held firms have attracted intense political and media attention, of which Enron and WorldCom are two striking examples. Capital markets are alarmed at such news. The scandals in 2002 have attracted the attention of the securities regulators, accounting standard setters, Congress, and even the President to corporate earnings management. These guardians of shareholder interests can be too zealous, even for the good of their wards. The push for increased transparency in financial reporting and corporate governance serves the shareholders only up to a point. Beyond that, managerial inhibitions induced by a lack of privacy can damage the interests of shareholders. In other words, increasing transparency without limits does not necessarily improve corporate governance. For extreme example, installing monitoring ca

ABSTRACT: Do short sale transactions precede bad news events? Not recently. This paper examines short sale transactions around significant news events. Using a novel and comprehensive dataset covering daily short sale transactions for 4,193 securities on the New York Stock Exchange for the period April 1, 2004 through March 31, 2005, we find no evidence that short sale transactions are concentrated prior to bad news events. This challenges prior research that has found short sale transactions have tended to precede stock price declines. Additional analysis reveals that there is no reliable evidence of daily changes in short sales transactions leading daily stock returns, inconsistent with the notion that short sale transactions (at least in the aggregate) are based on private information. Data Availability: The data used in this study are available from the sources identified in the study.

We present a two-stage model for the decision making process of …nancial analysts when issuing earnings forecasts. In the …rst stage, …nancial analysts perform a fundamental analysis in which they are prone to a behavioral bias. In the second stage analysts can adjust their earnings forecast in line with their strategic incentives. The paper analyzes this decision process throughout the forecasting period and explains the underlying drivers. Using quarterly earnings forecasts, we document that …nancial analysts overweight their private information throughout the entire forecasting period. At the same time, …nancial analysts behave strategically. They issue initial optimistic forecasts by strategically in‡ating their forecast. In their last revision, they become pessimistic and strategically de‡ate their earnings forecast, which creates the possibility of a positive earnings surprise. This analysis of the dynamics of the decision process provides empirical evidence on the coexistence of overcon…dence and strategic incentives. Keywords: Financial analysts, Earnings Forecasts, Overcon…dence, Con‡icts of interest. JEL-classi…cations: G14; G17; G24 We thank Bertrand Melenberg and seminar participants at Tilburg University for comments that improved the paper.

: This study examines whether it is cost beneficial for managers to guide analysts' forecasts downward and subsequently meet or beat expectations. We provide evidence on the cost benefit trade-offs by examining the weights placed by market participants on forecast revisions and forecast errors in determining share prices. We find that the cost of lowering expectations, i.e., market reaction to negative forecast revision, is lower than the benefits from reporting a positive earnings surprise. Thus, we find that beating expectations by lowering expectations is cost beneficial. However, in recent years the net benefits to such a strategy are no longer significant. We also find that capital market participants do not reward all firms that meet expectations. In fact, firms that guide analyst forecast downward and subsequently meet expectations experience negative abnormal returns. The Valuation Consequences of Meeting and Beating Expectations: Implications of Management Guidance. 1. Intro...

We test predictions relating to the role of financial analysts in aiding investors ’ assessment of the different valuation implications of the cash flow and accrual components of earnings. First, we examine whether analysts revise their forecasts of future earnings in anticipation of predictable accrual reversals. Then, we examine whether share prices reflect predictable accrual reversals differently depending on analyst activity. Our findings suggest that analysts act as sophisticated information intermediaries in that some analysts are able to identify firms with less persistent accruals. However, share prices do not reflect the information conveyed by analyst forecast revisions. Rather, investors appear to expect the same persistence in earnings, regardless of its cash flow and accrual components and regardless of analyst activity, until the accruals reverse. Thus, incorporating information from analyst activity substantially improves short-tem returns to an accrual-based trading strategy.