Two essays on the role of financial analysts in relation to the trading behavior

Abstract

This paper examines the informational role of financial analysts from different perspectives. The first essay examines the informational role of financial analysts using the future earnings response coefficient (FERC) model. The second essay investigates whether there exists prerelease information leakage of analyst reports to institutional investors. First, the role of sophisticated investors with regard to pricing future earnings is examined in Korean stock markets. The results show that the informativeness of stock returns for future earnings, measured as the future earnings response coefficient (FERC), increases with the increase in analyst following and institutional ownership. Then, this paper investigates how the recently introduced Regulation Fair Disclosure in Korea affects the FERC and its relation to analyst following and institutional ownership. The results show that in general Reg FD decreases the future earnings response coefficient and its relation to analyst following. This suggests that analysts’ ability to predict future earnings has been impaired since the regulation was introduced. The second chapter investigates existence of prerelease information leakage of analyst reports to institution investors. Analysts are likely to provide tips about their reports to client institutional investors in order to raise commission revenue. To determine a direct link between information leakage and institutional trading, this study investigates different trading behaviors between clients and non-clients. My hypothesis is that if there is information leakage then the clients’ prerelease trading volume increases more and earlier than the non-clients’. Then, this paper investigates whether the trading behaviors of clients and non-clients are different depending on the characteristics of analysts’ forecasts.