Essays on analyst herding behavior and managerial myopia

Abstract

This thesis examines the association between underwriting relationships and financial analysts’ herding behavior around equity offerings and the managerial myopic investment behavior motivated by their career-concern. The first study examines the effects of underwriting relationships on analyst herding behavior. The results suggest that analysts employed by the lead-underwriter banks of seasoned equity offerings are more likely to provide bold forecasts than unaffiliated analysts, indicating that institutional affiliations surrounding analysts, as well as their individual characteristics, are associated with their herding tendency. In spite of conflicts of interest from the investment banking business, lead-underwriter analysts provide more accurate earnings forecasts than unaffiliated analysts, and their superiority is more obvious in the sub-sample of bold forecast revisions. However, an additional investigation shows that investment banking affiliations also influence analysts’ herding tendency in stock recommendations, implying the potential prevalence of optimism among analysts. The study also finds that the difference in forecast boldness between affiliated and unaffiliated analysts has significantly diminished since the passage of Regulation Fair Disclosure, which prohibits managers’ selective disclosures to market participants. The second study investigates CEOs’ risk of forced termination and its influence on discretionary investment expenditures. Based on the historical data of executive forced dismissals during 1993-2010, I verify that the likelihood of forced turnover is significantly associated with several ex ante firm and CEO characteristics. The second-stage regression results show that managers with a higher estimated turnover risk are more likely to reduce R&D and capital expenditures, implying that managers’ career concern might be one of primary motivations for myopic investment behavior. The study also finds that the investment reduction t...