IR Papers: Democratic analysts are audacious

Dec 07, 2010
<p>A roundup of academic research from the world of IR studies</p>

The political affiliations of equity analysts can affect earnings forecasts and market prices. Using data from 1993 to 2009, US researchers found Republican analysts more likely to issue significantly less optimistic forecasts and less likely to deviate from the consensus. Compared with an analyst with a Democratic orientation (as measured by political campaign contributions), a Republican analyst has a 6 percent to 12 percent lower forecast error, on average.

‘Analysts who are Democrats are also more likely to be optimists,’ says study co-author Alok Kumar, professor of finance at the University of Miami. ‘To ensure forecast accuracy, IR people may want to make a point of adjusting communications with a view to reining in expectations.’

The researchers found companies in the oil and gas, chemicals, mining and tobacco products industries tended to have most Republican analysts, while real estate, pharmaceuticals and communications had a higher concentration of Democrats.

The power of proxy advisers
Popular press accounts may substantially overstate the influence of ISS, according to US researchers. Using several different tests to measure uncontested director elections, the researchers calculate that an ISS recommendation shifts 6 percent to 10 percent of shareholder votes. Of the four proxy advisers studied, only ISS and Glass Lewis had ‘meaningful impact on shareholder voting’.

Even then that might be overstating things. Study co-author Jill Fisch, professor of law at the University of Pennsylvania, says a major reason for ISS’ influence is that it bases its recommendations (to a greater extent than other advisers) on factors its subscribers consider important.

‘Merely looking at the correlation between recommendations and outcomes ignores the fact that many institutions do their own research,’ says Fisch. ‘The fact that ISS’ recommendations may mirror those of the institutions doesn’t mean it caused their vote.’ Fisch notes that ISS conducts extensive surveys of its clientele to find out what issues matter to them. ‘Whether that’s a good thing or not depends on whether you are trying to summarize how governance fits with their preferences or whether you are also trying to shape those preferences,’ she concludes.

World o’ research

  • Shareholders want it but Bangladeshi commercial banks are not enthusiastic about the necessity of broadening intellectual capital reporting, say Dhaka-based researchers. Empirical evidence from Finland and Sweden shows retail investors prefer smaller-sized companies, in domestic as well as foreign markets. They tilt toward value stocks at home, preferring growth in their foreign holdings, according to work from the Aalto University School of Economics.
  • The primary determinant of the fair value of a company’s stock is based on ‘the gut feeling of financial analysts,’ according to research conducted at Sweden’s Lund University. Published in the International Journal of Critical Accounting, the study concludes: ‘Financial quantification achieved by the application of models and statistics plays a minor role and although it is not used for determining valuations, it does have applications in terms of rationalizing, validating and justifying valuation assessment. To bolster their gut feelings, analysts need person-to-person meetings with corporate managers.’
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