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| Straight
talk about today's markets
A timeless amusing video on "Analysts' standards", from
Saturday Night Live show
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[Keynes]
"Worldly wisdom teaches that it is better for reputation to
fail conventionally than to succeed unconventionally". Humans
have a strong desire to be part of a group: the group offers safety,
confirmation and simplifies decision-making. Further, if something
should go wrong, it is more comforting to be with others than to
be alone |
The
Complete Guide to Wall Street Self-Defense, Blodget (on Slate.com),
2004
What you won't learn from your broker? How Long Is "The Long
Run"? (Stocks are a great investment - if you can wait 30 years).
What's Your Real Projected Returns? (after fees, costs, taxes, and
inflation). What financial advisers are good for? (and what they
probably aren't). What "Buy" Means? The Folly of "Cheap"
and "Expensive" Stocks. When They Say "Buy",
Sell (The least-bad market prediction tool). Smart? Skillful? Probably
Just Lucky (The vast and unappreciated role of luck in investing).
What Stock Analysts Are Good For? (A lot - but not picking stocks).
Why Wall Street Hates the "S" Word? (The real reason there
are so few "sell" recommendations). |
Are
Small Investors Naive About Incentives?, Malmendier, Shanthikumar,
2003
"Analysts face incentives to positively bias the information
they provide to investors. These incentives are reflected in the
very low number of sell and strong sell recommendations issued by
all analysts, in particular by affiliated analysts. We find that
small investors do not adjust for the incentives of an analyst who
faces an underwriting affiliation. While large investors do not
place buy pressure on a stock following an affiliated buy or strong
buy recommendation, small investors do. Large investors react more
weakly to positive affiliated recommendations than to unaffiliated
recommendations, while small traders react almost exactly the same
to both affiliated and unaffiliated recommendations. Return results
show that following affiliated recommendations consistently earns
lower returns than following unaffiliated recommendations, over
many possible time horizons, and with many portfolio strategies.
Small traders make losses by naively following affiliated analyst
recommendations. Finally, additional competition does not seem to
solve the problem. Affiliated analysts issue even higher recommendations
when they face more competition. It is possible that small traders
simply cannot identify underwriting affiliation, or that it is too
costly for them to research an analyst's background. In this case,
investors should react more cautiously to recommendations in general,
but instead our abnormal trade imbalance results suggest that small
traders react more strongly to the general recommendation than large
traders. Alternatively, small traders should focus on analysts from
non-underwriting firms. Instead, small traders react less to these
analysts. Our results thus far indicate that analyst incentives
affect their recommendations, with competition among analysts failing
to mitigate the effect, and that small investors fail to account
for these distortionary incentives. Overall, the traditional economic
assumption of uninformed agents taking into account the incentives
of informed agents, does not seem to hold for small investors in
the market for information about stocks". |
The
Cross-Section of Analyst Recommendations, Sorescu and Subrahmanyam,
2004
We analyze the relation between analyst attributes (years of experience,
reputation of the analysts' brokerage houses) and the short- and
long-term price reactions to recommendations made by the analysts.
We find that in the long-term, the recommendation changes of highly
experienced analysts outperform those of low-experience ones. In
addition, investors appear to overreact to dramatic upgrades of
low-ability analysts, and underreact to small upgrades by high-ability
analysts. These results are consistent with the Griffin and Tversky
(1992) argument that agents place too much emphasis on the strength
of the signal (the dramatic nature of the event) and insufficient
emphasis on the weight (the ability of the analyst making the recommendation).
Agents are prone to attaching undue importance to the enthusiasm
in a recommendation letter, and not enough importance to the credibility
of the recommendation writer. Since the investor bias is
stronger for more extreme (high-strength) signals, the market overreacts
to such signals. At the same time, the market underreacts to the
weight (quality) of the signal. The net result is that prices experience
reversals (overreaction) following high-strength, low-weight signals
and drift (underreaction) following high-weight, low-strength signals.
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Analyzing
the Analysts: Career Concerns and Biased Earnings Forecasts,
Hong, Kubik, 2001
"This paper examines the career concerns of security analysts.
We relate long histories of their earnings forecasts to job separations.
We find that relatively accurate past forecasts lead to favorable
career outcomes such as remaining at or moving up to a high status
(large, prestigious) brokerage house. Controlling for accuracy,
optimistic forecasts relative to the consensus increase the chances
of favorable job separations. Job separations depend much less on
accuracy for analysts who cover stocks that are underwritten by
their brokerage houses. Such analysts are also much more likely
to be rewarded for optimistic forecasts than other analysts. Furthermore,
job separations were much less sensitive to accuracy and somewhat
more sensitive to optimism during the stock market mania of the
late 1990s. These findings suggest that the well-documented analyst
forecast optimism bias is likely due to incentives to promote stocks. |
Conflict
of Interest and the Credibility of Underwriter Analyst Recommendations,
Michaely and Womack, 1999
"We show that stocks that underwriter analysts recommend perform
more poorly than "buy" recommendations by unaffiliated
brokers prior to, at the time of, and subsequent to the recommendation
date. We conclude that the recommendations by underwriter analysts
show significant evidence of bias. We show also that the market
does not recognize the full extent of this bias. The results suggest
a potential conflict of interest inherent in the different functions
that investment bankers perform". |
Prepared
Witness Testimony The House Committee on Energy and Commerce,
Mr. James S. Chanos, President & Founder Kynikos Associates,
Ltd., 2002
"It was clear to us that most of these analysts were hopelessly
conflicted over the investment banking and advisory fees that Enron
was paying to their firms. I can't think of one major financial
fraud in the United States in the last ten years that was uncovered
by a major brokerage house analyst or an outside accounting firm.
Almost every such fraud ultimately was unmasked by short sellers
and/or financial journalists. In addition, a company's adherence
to GAAP (generally accepted accounting principles), does not mean
that the company's earnings and financial position are not overstated.
GAAP allows too much leeway in the use of estimates, forecasts and
other inherently unknowable things to portray current results. In
the hands of dishonest management (a rapidly growing subset in my
opinion), GAAP can mislead far more than they inform! Further, I
believe that certain aspects of GAAP, particularly accounting for
stock options in the United States, are basically a fraud themselves". |
The
Bubble and the Media, Dyck and Zingales, 2002
"What went wrong with recent corporate scandals, such as Enron
and Worldcom? To answer this question we delve deeper into the economics
of information collection and dissemination. We claim that the problem
is not just lack of appropriate disclosure or legislation, but a
more fundamental one: deficient incentives for the media to expose
poor governance practices. We argue that corporate reporters have
strong incentives to enter into a quid pro quo relationship with
their sources, where they receive private information in exchange
for a positive spin on companies' news. Any attempt to report negative
information or simply to question the existing optimistic consensus
incurs constant harassment from the target company. One UBS PaineWebber
analyst was fired three hours after issuing a warning about financial
deterioration at Enron, followed by a retraction of the negative
statement and UBS PaineWebber's issuance of an optimistic outlook
on Enron's future. During an investor conference call, a caller
who criticized Enron's delays in releasing financial information
was labeled an "asshole" by Skilling. Similarly, Fortune's
journalist McLean was labeled "unethical" by Skilling,
who hung up on her. Furthermore, the chairman of Enron, Ken Lay,
called Fortune's managing editor Rik Kirkland, implying that McLean's
piece should be cut. The incentives to report bad information about
a company change dramatically as the company's stock price deteriorates". |
ENRON
Uncovering the Uncovered Story, SHERMAN
Too frequently ... financial journalists "outsourced their
critical thinking skills to Wall Street analysts, who are not independent
and, by definition, were employed to do nothing but spin positive
company news in order to sell stock". "Business reporters
should probably not quote analysts at all. If they do quote them,
they should at least identify the firm and the firm's relationship
to the company that they're talking about". "The fall
of Enron is not merely a story about a company that cooked its books
and lied to its employees, but a window into larger, more systemic
questions about the role of the press in making sure that important
policy shifts are debated and discussed". "In the end,
what can the press learn from this affair? Certain things are obvious:
Business reporters should ponder their reliance on Wall Street analysts,
while expanding their contacts to include consumer advocates, mavericks,
and independent-minded employees". |
From
Wall Street To Web Street: Public Perceptions and Misperceptions
About Online Brokerage, Investor Protection And Securities
Bureau, 1999
"Aggressive advertising in this burgeoning online industry
has fueled the message of convenience, speed, easy wealth, and
the risk of "being left behind" in the new online era.
As described by the SEC Chairman Arthur Levitt, "when firms,
again and again, tell investors that on-line investing can make
them rich, it creates unrealistic expectations. What follows are
a few examples of how some of the advertising practices and advertising
content of online brokers may color the expectations of online
investors (Clicking the mouse is easy, making sounds investing
decisions is not; "Making a Trade" is not executing
a trade; Cheap, easy, peripatetic trading does not equal successful
trading; Speed, access, and reliability is dependent upon system
availability; All trades require a broker-dealer; The truth about
commissions)".
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An
Analyst Receives a Time Out From Altera, Morgenson, NYT, 2005
"For the 25 years that Tad LaFountain has been a technology
stock analyst on Wall Street, he has often written negatively
about the strategies or prospects of the companies he followed.
Not once did a company retaliate, he said. Until now. Mr. LaFountain,
who follows 21 semiconductor companies at Wells Fargo Securities
in New York, said yesterday that he was dropping coverage of the
Altera Corporation, an industry giant, because its executives
had told him they would not take his phone calls, would not let
him ask questions on analyst conference calls and would no longer
give him the information he needed to analyze its business".
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לומניס, אנליסטים והעיתונות
הכלכלית - הזווית הישראלית.
כיצד אנליסטים כשלו, שלא במפתיע, בתפקידם וכיצד עיתונות כלכלית בוחרת
במודע שלא לחקור ולהסתמך על רקורד אנליסטים קלוקל והרגעות מנהלי חברה
מוטים, תוך יצירת מצג שווא של הבנה ומומחיות. |
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ניגודי
עניינים בפעילות מתווכים פיננסים, בנק ישראל, 2003.
"הפוטנציאל לניגוד עניינים קיים לא רק בפעילות של הבנקים אלא
גם בזו של מתווכים פיננסים אחרים, כשהם עוסקים במספר פעילויות יחד"
(מתן אשראי, חיתום, ניהול תיקים וייעוץ, החזקת מניות כבעלי עניין
ועוד).
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