Demographic Information and Additional Survey Responses Not Tabulated in Brown, Call, Clement, and Sharp (2015)

Transcription

1 -- ONLINE APPENDIX -- Inside the Black Box of Sell-Side Financial Analysts Lawrence D. Brown Temple University Andrew C. Call Arizona State University Michael B. Clement* University of Texas at Austin Nathan Y. Sharp Texas A&M University Contents of Online Appendix: 1. Demographic Information and Additional Survey Responses Not Tabulated in Brown, Call, Clement, and Sharp (2015) pages Cross-Sectional Results for Brown, Call, Clement, and Sharp (2015) pages Survey Instrument for Brown, Call, Clement, and Sharp (2015) pages 41-50

2 Demographic Information and Additional Survey Responses Not Tabulated in Brown, Call, Clement, and Sharp (2015) Table A1 Demographic characteristics of survey respondents (n = 365) Primary Industry Sample IBES Education Sample IBES Retail/Wholesale 9.32 Bachelor s degree in accounting 8.03 Mining/Construction 7.40 Bachelor s degree in business 9.97 Technology Bachelor s degree in economics Communications/Media 4.11 Bachelor s degree in finance Banking/Finance/Insurance Other bachelor s degree Manufacturing 4.93 MBA Consulting/Service 1.92 Other master s degree Public Utility 1.64 Ph.D Transportation/Energy Other Certifications Certified Financial Analyst Number of Industries Followed Certified Public Accountant Chartered Accountant Certified Management Accountant Other Years as Sell-Side Analyst Number of Firms Followed < Years with Current Employer < Age < Size of Current Employer One sell-side analyst sell-side analysts Gender 5-10 sell-side analysts Female sell-side analysts Male sell-side analysts More than 50 sell-side analysts

3 Table A2 Correlation coefficients for demographic variables # of Industries Followed # of Firms Followed # of Firms Followed Age Gender MBA Certifications Years as an Analyst Years with Employer Age Gender ** 0.107** MBA ** 0.340*** Certifications * Years as an Analyst ** 0.748*** 0.096* 0.182** Years with Employer *** * 0.534*** Broker Size *** 0.154*** *** * ** We report Spearman correlations based on the groupings presented in Table 1. Correlations for gender are based on female (male) analysts being assigned a value of 0 (1). Correlations for education are based on analysts without (with) an MBA being assigned a value of 0 (1). Correlations for certifications are based on analysts without (with) a CFA certification being assigned a value of 0 (1). 2

4 Table A3 Survey responses to the question: How often do you have direct contact with the CEO or CFO of the typical firm you cover? Responses % of Respondents Who Answered (1) Never 1.65 (2) Once a year 7.16 (3) Twice a year (4) Three times a year 9.92 (5) Four times a year (6) Five or more times a year N = 363 3

5 Table A4 Survey responses to the question: How likely are you to take the following actions if you observe a red flag of management effort to intentionally misrepresent the firm s financial statements? % of Respondents Who Answered Responses Average Rating Significantly Greater Than Very Likely (5 or 6) Very Unlikely (0 or 1) (1) Seek additional information from management (2) Seek additional information from non-management sources (3) Revise your stock recommendation downward (4) Revise your earnings forecasts downward (5) Stop covering the firm Total possible N = 180 Column 1 reports the average rating, where higher values correspond to greater likelihood. Column 2 reports the results of t-tests of the null hypothesis that the average rating for a given item is not different from the average rating of the other items. We report the rows for which the average rating significantly exceeds the average rating of the corresponding items at the 5% level, and use Bonferroni-Holm-adjusted p-values to correct for multiple comparisons. Column 3 (4) presents the percentage of respondents indicating likelihood of 5 or 6 (0 or 1). 4

6 Table A5 Comparison of Downward vs. Upward Pressure within Earnings Forecasts and Stock Recommendations Panel A: Survey responses to the EF version of the questions: How often does research management pressure you to issue an earnings forecast that is lower than (exceeds) what your own research would support? Responses % of EF Respondents Who Answered Lower Than Exceeds T-Statistic (1) Never (2) 1-2% of the time (3) 3-5% of the time (4) 6-10% of the time (5) 11-20% of the time (6) More than 20% of the time N = 184 Column 1 (2) presents the percent of respondents indicating each response. Column 3 reports the results of a t-test of the null hypothesis that analysts experience the same pressure to issue earnings forecasts that are lower than vs. exceed what their own research would support. We also indicate the significance level, where ***, **, and * indicate rejection at the 1%, 5%, and 10% level, respectively. 5

7 Table A5 (continued) Comparison of Downward vs. Upward Pressure within Earnings Forecasts and Stock Recommendations Panel B: Survey response to the SR version of the questions: How often does research management pressure you to issue a stock recommendation is less favorable (more favorable) than what your own research would support? % of SR Respondents Who Answered Responses Less Favorable More Favorable T-Statistic (1) Never ** (2) 1-2% of the time (3) 3-5% of the time (4) 6-10% of the time * (5) 11-20% of the time (6) More than 20% of the time N = 180 Column 1 (2) presents the percent of respondents indicating each response. Column 3 reports the results of a t-test of the null hypothesis that analysts experience the same pressure to issue stock recommendations that are less favorable vs. more favorable than what their own research would support. We also indicate the significance level, where ***, **, and * indicate rejection at the 1%, 5%, and 10% level, respectively. 6

8 Cross-Sectional Results for Brown, Call, Clement, and Sharp (2015) Table A6 Correlation Coefficients for Independent Variables Correlations for independent variables Broker_ Size II_ AllStar StarMine WSJ IB Gender Acct MBA CFA Experience Acct MBA ** --- CFA 0.098* Experience 0.114** *** Broker_Size ** *** --- II_AllStar StarMine *** *** WSJ ** *** 0.311*** --- IB Retail_Focus ** * HF_Focus ** Correlations for the independent variables used to test for cross-sectional differences in survey responses. ***, **, and * represent significance (two-tailed) at the 1%, 5%, and 10% levels, respectively. Gender is an indicator variable equal to 1 if the analyst is male, and equal to 0 if the analyst is female. Acct is an indicator variable equal to 1 if the analyst has an accounting degree, and 0 otherwise. MBA is an indicator variable equal to 1 if the analyst has an MBA, and 0 otherwise. CFA is an indicator variable equal to 1 if the analyst is a CFA, and 0 otherwise. Experience is an indicator variable equal to 1 if the analyst has 7+ years of experience as a sell-side analyst, and 0 otherwise. Broker_Size is an indicator variable equal to 1 if the analyst works for an employer with 26+ sell-side analysts, and 0 otherwise. II_AllStar is an indicator variable equal to 1 if the analyst is listed as an II All-Star in the rankings published closest to the time the survey was administered, and 0 otherwise. StarMine is an indicator variable equal to 1 if the analyst is ranked by StarMine in the rankings published closest to the time the survey was administered, and 0 otherwise. WSJ is an indicator variable equal to 1 if the analyst received WSJ s Best on the Street award in the most rankings published closest to the time the survey was administered, and 0 otherwise. IB is an indicator variable if the analyst s employer participates in investment banking, and 0 otherwise (based on the Bradshaw measure). Retail_Focus is an indicator variable equal to 1 if the analyst indicated that retail brokerage clients are very important clients to his/her employer, and 0 otherwise. HF_Focus is an indicator variable equal to 1 if the analyst indicated that hedge funds are very important clients to his/her employer, and 0 otherwise. ***, **, and * represent significance (two-tailed) at the 1%, 5%, and 10% levels, respectively. Retail_ Focus 7

9 Table A7 Survey responses to the question: How useful are the following for determining your earnings forecasts (stock recommendations)? Panel A: Cross-sectional variation in survey responses for the EF version Your industry knowledge Private communication with management Earnings conference calls Management s earnings guidance Quality or reputation of management Primary research (e.g., channel checks, surveys, etc.) Gender ** Acct MBA CFA Experience ** Broker_Size II_AllStar * ** StarMine 0.773* WSJ * IB Retail_Focus HF_Focus * 0.381* 0.541** R % 11.9% 10.7% 11.0% 22.8% 13.6% N

10 Recent 10-K or 10-Q Recent earnings performance Your stock recommendation Other analysts earnings forecasts Recent stock price performance Gender ** ** Acct MBA *** CFA ** Experience *** *** Broker_Size * II_AllStar StarMine 1.337** 1.051* WSJ IB Retail_Focus * HF_Focus ** R % 14.8% 22.4% 8.5% 20.8% N

11 Panel B: Cross-sectional variation in survey responses for the SR version Your industry knowledge Your earnings forecast Private communication with management Quality or reputation of management Primary research (e.g., channel checks, surveys, etc.) Recent 10-K or 10-Q Gender * Acct MBA ** * CFA * * Experience * Broker_Size ** II_AllStar ** StarMine WSJ IB Retail_Focus ** HF_Focus *** R % 14.6% 22.5% 10.2% 12.2% 18.4% N

12 Earnings conference calls Management s earnings guidance Recent earnings performance Recent stock price performance Other analysts stock recommendations Gender * * ** Acct MBA CFA Experience Broker_Size II_AllStar StarMine ** WSJ IB * Retail_Focus HF_Focus 1.050*** R % 16.8% 11.5% 14.0% 13.5% N The dependent variable is the analyst s response to the survey question, ranging from 0 to 6. All independent variables are as defined in Table 2. We include industry fixed effects based on the primary industry the analyst covers. ***, **, and * represent significance (two-tailed) at the 1%, 5%, and 10% levels, respectively. 11

13 Table A8 Survey responses to the question: How often do you use the following valuation models to support your stock recommendation? Price/earnings (P/E) or Price/earnings growth (PEG) model Cash flow model Dividend discount model A model based on earnings momentum or earnings surprises Gender Acct * MBA CFA Experience ** Broker_Size II_AllStar StarMine WSJ IB Retail_Focus HF_Focus 0.743* R % 10.8% 15.6% 17.9% N

14 Economic value added (EVA) model Residual income model A model based on stock price and volume patterns Gender ** Acct MBA 0.570* * CFA Experience 0.584** ** Broker_Size ** *** II_AllStar StarMine WSJ IB Retail_Focus 0.951* HF_Focus R % 16.2% 17.3% N The dependent variable is the analyst s response to the survey question, ranging from 0 to 6. All independent variables are as defined in Table 2. We include industry fixed effects based on the primary industry the analyst covers. ***, **, and * represent significance (two-tailed) at the 1%, 5%, and 10% levels, respectively. 13

15 Table A9 Survey responses to the question: How often do you have direct contact with the CEO or CFO of the typical firm you cover? Never = 1; Five or more times a year = 6 Gender Acct MBA CFA Experience Broker_Size II_AllStar StarMine WSJ IB Retail_Focus HF_Focus R 2 5.3% N 342 The dependent variable is the analyst s response to the survey question, ranging from 0 to 6. All independent variables are as defined in Table 2. We include industry fixed effects based on the primary industry the analyst covers. ***, **, and * represent significance (two-tailed) at the 1%, 5%, and 10% levels, respectively. 14

16 Table A10 Survey responses to the question: How useful are the following types of direct contact with management for the purpose of generating your earnings forecasts (stock recommendation)? Panel A: Cross-sectional variation in survey responses for the EF version Private phone calls with management The Q&A portion of earnings conference calls Company investor day events Road shows Gender * Acct MBA * CFA Experience ** Broker_Size ** II_AllStar * StarMine WSJ IB Retail_Focus HF_Focus 0.873*** R % 10.4% 8.9% 16.1% N

17 Management s presentation on earnings conference calls Company or plant visits Industry conferences Conferences sponsored by your employer Gender Acct MBA * CFA Experience * Broker_Size II_AllStar StarMine * WSJ IB Retail_Focus HF_Focus R % 10.7% 7.5% 11.2% N

18 Panel B: Cross-sectional variation in survey responses for the SR version Private phone calls with management Company or plant visits Road shows Company investor day events Gender * Acct MBA CFA Experience ** Broker_Size * II_AllStar StarMine WSJ ** IB Retail_Focus HF_Focus ** 0.903*** 0.712** R % 24.2% 18.2% 10.2% N

19 The Q&A portion of earnings conference calls Conferences sponsored by your employer Industry conferences Management s presentation on earnings conference calls Gender * Acct MBA *** CFA Experience Broker_Size ** II_AllStar StarMine * WSJ IB Retail_Focus HF_Focus 0.564** 0.731** R % 13.6% 25.1% 15.3% N The dependent variable is the analyst s response to the survey question, ranging from 0 to 6. All independent variables are as defined in Table 2. We include industry fixed effects based on the primary industry the analyst covers. ***, **, and * represent significance (two-tailed) at the 1%, 5%, and 10% levels, respectively. 18

20 Table A11 Survey responses to the question: How important are the following to your assessment of whether a company s quality of reported earnings is high? Earnings are backed by operating cash flows Earnings reflect economic reality Earnings are sustainable and repeatable Earnings reflect consistent reporting choices over time Company managers have high integrity or moral character Earnings are free from one-time or special items Gender *** Acct * MBA CFA * Experience ** Broker_Size *** II_AllStar ** ** * StarMine * WSJ IB Retail_Focus ** 0.621* HF_Focus R % 12.7% 14.8% 15.7% 17.0% 12.8% N

21 Earnings can predict future cash flows Company has strong corporate governance Earnings can predict future earnings Earnings are not highly dependent on long-term estimates Earnings are less volatile than operating cash flows Company is audited by a Big 4 auditor Gender Acct ** MBA CFA 0.536** ** Experience Broker_Size *** II_AllStar *** ** ** StarMine WSJ * IB Retail_Focus 0.720** 0.882*** 0.595* HF_Focus R % 17.8% 10.2% 8.3% 13.6% 14.7% N The dependent variable is the analyst s response to the survey question, ranging from 0 to 6. All independent variables are as defined in Table 2. We include industry fixed effects based on the primary industry the analyst covers. ***, **, and * represent significance (two-tailed) at the 1%, 5%, and 10% levels, respectively. 20

22 Table A12 Survey responses to the question: To what extent do you believe the following indicate management effort to intentionally misrepresent the financial statements? Company has weak corporate governance Large or frequent onetime items or special items Company has a material internal control weakness Large gap between earnings and operating cash flows Company consistently reports smooth earnings Management is overconfident and/or overly optimistic Gender Acct * 1.020** * MBA CFA ** * Experience Broker_Size * ** II_AllStar ** *** ** StarMine WSJ IB Retail_Focus HF_Focus R % 15.5% 19.3% 13.1% 7.8% 16.2% N

23 Company recently restated earnings Deviations from industry or peer norms Management wealth is closely tied to stock price Recent auditor turnover Company consistently meets or beats earnings targets Recent management turnover Gender Acct ** MBA CFA ** * Experience Broker_Size ** *** *** ** II_AllStar ** * *** * * ** StarMine * * WSJ ** IB Retail_Focus 0.745* 0.788* * HF_Focus R % 18.9% 18.1% 18.1% 13.8% 23.6% N The dependent variable is the analyst s response to the survey question, ranging from 0 to 6. All independent variables are as defined in Table 2. We include industry fixed effects based on the primary industry the analyst covers. ***, **, and * represent significance (two-tailed) at the 1%, 5%, and 10% levels, respectively. 22

24 Table A13 Survey responses to the question: How likely are you to take the following actions if you observe a red flag of management effort to intentionally misrepresent the firm s financial statements? Seek additional information from management Seek additional information from nonmanagement sources Revise your stock recommendation downward Revise your earnings forecasts downward Stop covering the firm Gender Acct * MBA CFA * Experience Broker_Size 0.364* *** II_AllStar * *** ** StarMine WSJ IB 0.566* Retail_Focus HF_Focus R % 23.9% 17.6% 13.1% 21.2% N The dependent variable is the analyst s response to the survey question, ranging from 0 to 6. All independent variables are as defined in Table 2. We include industry fixed effects based on the primary industry the analyst covers. ***, **, and * represent significance (two-tailed) at the 1%, 5%, and 10% levels, respectively. 23

25 Table A14 Survey responses to the question: How often do you exclude the following components of GAAP earnings when forecasting street earnings? Extraordinary items Discontinued items Restructuring charges Asset impairments Cumulative effect of accounting changes Gender Acct MBA CFA Experience Broker_Size * II_AllStar ** StarMine ** WSJ IB Retail_Focus HF_Focus 0.726** 0.888** 0.951*** 0.930** R % 19.5% 17.8% 12.1% 11.5% N

26 Non-operating items Stock option expense Amortization Changes in working capital Depreciation Gender 0.097** Acct MBA CFA Experience Broker_Size II_AllStar StarMine WSJ IB Retail_Focus HF_Focus R % 25.4% 22.6% 13.5% 14.8% N The dependent variable is the analyst s response to the survey question, ranging from 0 to 6. All independent variables are as defined in Table 2. We include industry fixed effects based on the primary industry the analyst covers. ***, **, and * represent significance (two-tailed) at the 1%, 5%, and 10% levels, respectively. 25

27 Table A15 Survey responses to the question: Do you exclude components of GAAP earnings from your forecast of street earnings for the following reasons? Because you believe the component is non-recurring Because you believe excluding the component improves your earnings forecast accuracy Because you want to be consistent with management guidance Because you want to be consistent with other sell-side analysts Because you want to be consistent with communication from I/B/E/S, First Call, Zacks, or S&P Gender Acct MBA CFA Experience Broker_Size * ** II_AllStar * * StarMine WSJ IB Retail_Focus * HF_Focus R % 8.0% 18.7% 14.7% 24.5% N The dependent variable is the analyst s response to the survey question, ranging from 0 to 6. All independent variables are as defined in Table 2. We include industry fixed effects based on the primary industry the analyst covers. ***, **, and * represent significance (two-tailed) at the 1%, 5%, and 10% levels, respectively. 26

28 Table A16 Survey responses to the question: How important are the following to your compensation? Your industry knowledge Your standing in analyst rankings or broker votes Your professional integrity Your accessibility and/or responsiveness Your relationship with management of the companies you follow Gender Acct MBA *** * CFA Experience 0.325** 0.426** 0.283* 0.281** Broker_Size *** II_AllStar StarMine 0.672** * WSJ * * IB Retail_Focus *** 0.559** HF_Focus 0.325** 0.802*** *** 0.496** R % 19.7% 7.0% 8.5% 8.0% N

29 Your success at generating underwriting business or trading commissions Your written reports The profitability of your stock recommendations The accuracy and timeliness of your earnings forecasts Gender 0.501* *** Acct MBA *** *** CFA Experience * * Broker_Size ** * *** II_AllStar * StarMine WSJ IB Retail_Focus * 0.684*** 0.397* 0.713*** HF_Focus 1.015*** 0.286* 0.377* R % 9.8% 10.8% 11.7% N The dependent variable is the analyst s response to the survey question, ranging from 0 to 6. All independent variables are as defined in Table 2. We include industry fixed effects based on the primary industry the analyst covers. ***, **, and * represent significance (two-tailed) at the 1%, 5%, and 10% levels, respectively. 28

30 Table A17 Survey responses to the question: How important are the following analyst rankings for your career advancement? Broker or Client votes Institutional Investor s All- American Research Team The Wall Street Journal s Survey of Award Winning Analysts Star Mine Analyst Awards Zacks All-Star Analyst Ratings Gender ** * Acct * MBA CFA ** Experience ** ** ** *** Broker_Size 0.671*** 1.152*** II_AllStar ** ** ** StarMine WSJ IB Retail_Focus HF_Focus 0.912*** 0.956*** R % 16.2% 6.0% 9.7% 6.6% N The dependent variable is the analyst s response to the survey question, ranging from 0 to 6. All independent variables are as defined in Table 2. We include industry fixed effects based on the primary industry the analyst covers. ***, **, and * represent significance (two-tailed) at the 1%, 5%, and 10% levels, respectively. 29

31 Table A18 Survey responses to the question: How important are the following in motivating you to accurately forecast earnings / make profitable stock recommendations? Panel A: Cross-sectional variation in survey responses for the EF version Your earnings forecast as an input to your stock recommendation Demand from your clients Your reputation with management of the companies you follow Your standing in analyst rankings Your job security Your job mobility Your compensation Gender ** * * Acct ** ** MBA CFA Experience ** *** * Broker_Size * II_AllStar ** ** StarMine *** WSJ IB Retail_Focus * HF_Focus *** R % 14.6% 11.5% 11.6% 17.3% 12.5% 25.0% N

32 Panel B: Cross-sectional variation in survey responses for the SR version Demand from your clients Your standing in analyst rankings Your compensation Your job security Your job mobility Your reputation with management of the companies you follow Your stock recommendation as an input to your earnings forecast Gender 0.848** *** 0.860** 0.745* Acct MBA ** CFA * Experience *** Broker_Size II_AllStar ** StarMine * ** WSJ IB * Retail_Focus HF_Focus R % 9.6% 17.9% 15.0% 12.8% 19.6% 8.8% N The dependent variable is the analyst s response to the survey question, ranging from 0 to 6. All independent variables are as defined in Table 2. We include industry fixed effects based on the primary industry the analyst covers. ***, **, and * represent significance (two-tailed) at the 1%, 5%, and 10% levels, respectively. 31

33 Table A19 Survey responses to the question: How likely are the following consequences to you of issuing an earnings forecast (stock recommendation) that is well below the consensus? Panel A: Cross-sectional variation in survey responses for the EF version An increase in your investing clients perception of your credibility Loss of access to management Being frozen out of the Q&A portion of future conference calls Damage to your employer s business relationship with the company Gender Acct * MBA CFA ** Experience Broker_Size II_AllStar StarMine WSJ * IB Retail_Focus * HF_Focus R 2 5.7% 10.3% 15.9% 11.7% N

34 Damage to your employer s business relationship with buy-side clients who hold stock in the firm Promotion less likely Lower bonus / compensation Gender * Acct MBA CFA ** ** ** Experience * Broker_Size II_AllStar StarMine * WSJ IB Retail_Focus HF_Focus R % 21.8% 18.6% N

35 Panel B: Cross-sectional variation in survey responses for the SR version An increase in your investing clients perception of your credibility Loss of access to management Being frozen out of the Q&A portion of future conference calls Damage to your employer s business relationship with the company Gender Acct MBA CFA Experience Broker_Size II_AllStar StarMine WSJ ** IB Retail_Focus HF_Focus ** R 2 6.3% 15.2% 10.7% 9.2% N

36 Damage to your employer s business relationship with buy-side clients who hold stock in the firm Lower bonus / compensation Promotion less likely Gender ** Acct MBA CFA Experience Broker_Size II_AllStar ** StarMine * WSJ IB Retail_Focus ** HF_Focus ** ** ** R 2 7.0% 17.2% 19.1% N The dependent variable is the analyst s response to the survey question, ranging from 0 to 6. All independent variables are as defined in Table 2. We include industry fixed effects based on the primary industry the analyst covers. ***, **, and * represent significance (two-tailed) at the 1%, 5%, and 10% levels, respectively. 35

37 Table A20 Survey responses to the question: How often does research management pressure you to issue an earnings forecast that is lower than (exceeds) what your own research would support? Panel A: Cross-sectional variation in survey responses for the EF version Lower Than Exceeds Gender Acct 0.690* MBA CFA Experience Broker_Size II_AllStar StarMine WSJ * IB Retail_Focus HF_Focus R % 10.6% N

38 Table A20 (cont.) Survey responses to the question: How often does research management pressure you to issue a stock recommendation that is less (more) favorable than what your own research would support? Panel B: Cross-sectional variation in survey responses for the SR version Less Favorable Than More Favorable Than Gender Acct ** MBA CFA Experience Broker_Size II_AllStar StarMine WSJ IB Retail_Focus HF_Focus * R % 15.8% N The dependent variable is the analyst s response to this survey question, ranging from 1 ( Never ) to 6 ( More than 20% of the time ). All independent variables are as defined in Table 2. We include industry fixed effects based on the primary industry the analyst covers. ***, **, and * represent significance (two-tailed) at the 1%, 5%, and 10% levels, respectively. 37

39 Table A21 Survey responses to the question: How important are the following clients to your employer? Hedge funds Mutual funds Definedbenefit pension funds Insurance firms Endowments and foundations High networth individuals Retail brokerage clients Gender ** * Acct * MBA CFA *** * Experience ** ** Broker_Size *** 0.622*** 0.388* 0.426** II_AllStar ** * * StarMine WSJ * IB Retail_Focus *** *** 0.628* 0.732** 1.959*** --- HF_Focus *** *** R 2 8.6% 24.5% 13.8% 7.2% 10.2% 18.6% 13.8% N The dependent variable is the analyst s response to the survey question, ranging from 0 to 6. All independent variables are as defined in Table 2. We include industry fixed effects based on the primary industry the analyst covers. ***, **, and * represent significance (two-tailed) at the 1%, 5%, and 10% levels, respectively. 38

40 Table A22 Survey responses to the question: How important are the following in the decision to cover a given company? Client demand for information about the company The similarity of the company with other companies you follow The stock s trading volume The company s growth prospects The stock s market capitalization The composition of the company s investor base Gender ** ** *** Acct MBA CFA * Experience Broker_Size ** II_AllStar * StarMine WSJ IB * * Retail_Focus HF_Focus 0.374** *** *** 0.387* R 2 6.1% 9.3% 9.7% 9.4% 7.9% 8.7% N

41 The company s investment banking relationship with your employer The company s disclosures The company s corporate governance The company s profitability Other sell-side analysts cover the company The predictability of the company s earnings Gender 0.503* ** ** ** *** Acct MBA CFA ** Experience ** *** Broker_Size 0.646*** *** *** *** II_AllStar *** ** *** ** StarMine * WSJ IB Retail_Focus * 0.534** HF_Focus R % 9.7% 11.4% 13.5% 7.1% 10.6% N The dependent variable is the analyst s response to the survey question, ranging from 0 to 6. All independent variables are as defined in Table 2. We include industry fixed effects based on the primary industry the analyst covers. ***, **, and * represent significance (two-tailed) at the 1%, 5%, and 10% levels, respectively. 40

42 Survey Instrument for Brown, Call, Clement, and Sharp (2015) Thank you for participating in our survey. Please answer all questions in terms of your activities as a sell-side analyst. Assume each question pertains to your primary industry of coverage. The survey has 14 questions and asks for basic demographic information at the end. It should take less than15 minutes to complete. In addition, at the end of the survey, you will be asked to select one of the following 4 charities to which we will make a donation on your behalf: Alzheimer's Association, American Cancer Society, American Red Cross, or CFA Program Scholarships. Your participation in the survey is voluntary, and a university-required consent form and privacy statement are located here if you wish to review them. Please click the button below to proceed to the survey. 41

43 Survey Questions EF Version Common Questions 1. How often do you have direct contact with the CEO or CFO of the typical firm you cover? a. Never b. Once a year c. Twice a year d. Three times a year e. Four times a year f. Five or more times a year 2. How important are the following clients to your employer? (0 = not at all important; 6 = very important) a. Hedge funds b. Mutual funds c. Defined-benefit pension funds d. Insurance firms e. Retail brokerage clients f. Endowments and foundations g. High net-worth individuals 3. How important are the following to your compensation? (0 = not at all important; 6 = very important) a. The accuracy and timeliness of your earnings forecasts b. The profitability of your stock recommendations c. Your industry knowledge d. Your relationship with management of the companies you follow e. Your professional integrity f. Your accessibility g. Your written reports h. Your standing in analyst rankings or broker votes i. Your success at generating underwriting business or trading commissions 4. How important are the following in the decision to cover a given company? (0 = not at all important; 6 = very important) a. The stock s trading volume b. The stock s market capitalization c. The company s profitability d. The company s growth prospects e. The company s corporate governance f. The company s disclosures g. The predictability of the company s earnings h. The company s investment banking relationship with your employer i. The composition of the company s investor base j. The similarity of the company to other companies you follow k. Client demand for information about the company l. Other sell-side analysts cover the company 42

44 5. How important are the following analyst rankings for your career advancement? (0 = not at all important; 6 = very important) Twin Questions a. Zacks All-Star Analyst Ratings b. The Wall Street Journal s Survey of Award Winning Analysts c. Institutional Investor s All-American Research Team d. Star Mine Analyst Awards e. Broker votes 6. How important are the following in motivating you to accurately forecast earnings? (0 = not at all important; 6 = very important) a. Demand from your clients b. Your standing in analyst rankings c. Your reputation with management of the companies you follow d. Your earnings forecast as an input to your stock recommendation e. Your compensation f. Your job security g. Your job mobility 7. How likely are the following consequences to you of issuing an earnings forecast that is well below the consensus? (0 = very unlikely; 6 = very likely) a. Loss of access to management b. Being frozen out of the Q&A portion of future conference calls c. Damage to your employer s business relationship with the company d. Damage to your employer s business relationship with buy-side clients who hold stock in the firm e. An increase in your investing clients perception of your credibility f. Lower bonus/compensation g. Promotion less likely 8. How useful are the following for determining your earnings forecasts? (0 = not at all useful; 6 = very useful) a. Your stock recommendation b. Other analysts earnings forecasts c. Your industry knowledge d. Recent stock price performance e. Recent earnings performance f. Recent 10-K or 10-Q g. Management s earnings guidance h. Quality or reputation of management i. Earnings conference calls j. Primary research (e.g., channel checks, surveys, etc.) k. Private communication with management 9. How useful are the following types of direct contact with management for the purpose of generating your earnings forecasts? (0 = not at all useful; 6 = very useful) a. Management s presentation on earnings conference calls 43

45 b. The Q&A portion of earnings conference calls c. Private phone calls with management d. Road shows e. Industry conferences f. Company investor day events g. Conferences sponsored by your employer h. Company or plant visits 10. How often does research management pressure you to issue an earnings forecast that is lower than what your own research would support? a. Never b. 1-2% of the time c. 3-5% of the time d. 6-10% of the time e. More than 10% of the time 11. How often does research management pressure you to issue an earnings forecast that exceeds what your own research would support? Unique Questions a. Never b. 1-2% of the time c. 3-5% of the time d. 6-10% of the time e. More than 10% of the time 12. How often do you exclude the following components of GAAP earnings when forecasting street earnings? (0 = never; 6 = always) a. Cumulative effect of accounting changes b. Discontinued items c. Extraordinary items d. Non-operating items e. Depreciation f. Restructuring charges g. Stock option expense h. Asset impairments i. Amortization j. Changes in working capital 13. Do you exclude components of GAAP earnings from your forecast of street earnings for the following reasons? (0 = never for this reason; 6 = always for this reason) a. Because you believe the component is non-recurring b. Because you believe excluding the component improves your earnings forecast accuracy c. Because you want to be consistent with other sell-side analysts d. Because you want to be consistent with management guidance e. Because you want to be consistent with communication from I/B/E/S, First Call, Zacks, or S&P 44

46 14. How important are the following to your assessment of whether a company s quality of reported earnings is high? (0 = not at all important; 6 = very important) a. Earnings reflect economic reality b. Earnings can predict future earnings c. Earnings can predict future cash flows d. Earnings are sustainable and repeatable e. Earnings reflect consistent reporting choices over time f. Earnings are not highly dependent on long-term estimates g. Earnings are free from one-time or special items h. Earnings are backed by operating cash flows i. Earnings are less volatile than operating cash flows j. Company is audited by a Big 4 auditor k. Company managers have high integrity or moral character l. Company has strong corporate governance 45

47 Survey Questions SR Version Common Questions 1. How often do you have direct contact with the CEO or CFO of the typical company you cover? a. Never b. Once a year c. Twice a year d. Three times a year e. Four times a year f. Five or more times a year 2. How important are the following clients to your employer? (0 = not at all important; 6 = very important) a. Hedge funds b. Mutual funds c. Defined-benefit pension funds d. Insurance firms e. Retail brokerage clients f. Endowments and foundations g. High net-worth individuals 3. How important are the following to your compensation? (0 = not at all important; 6 = very important) a. The accuracy and timeliness of your earnings forecasts b. The profitability of your stock recommendations c. Your industry knowledge d. Your relationship with management of the companies you follow e. Your professional integrity f. Your accessibility and\or responsiveness g. Your written reports h. Your standing in analyst rankings or broker votes i. Your success at generating underwriting business or trading commissions 4. How important are the following in the decision to cover a given company? (0 = not at all important; 6 = very important) a. The stock s trading volume b. The stock s market capitalization c. The company s profitability d. The company s growth prospects e. The company s corporate governance f. The company s disclosures g. The predictability of the company s earnings h. The amount of investment banking relationship with your employer i. The composition of the company s investor base j. The similarity of the company with other companies you follow k. Client demand for information about the company l. Other sell-side analysts cover the company 46

48 5. How important are the following analyst rankings for your career advancement? (0 = not at all important; 6 = very important) Twin Questions a. Zacks All-Star Analyst Ratings b. Wall Street Journal s Survey of Award Winning Analysts c. Institutional Investor s All-American Research Team d. Star Mine Analyst Awards e. Broker votes 6. How important are the following in motivating you to make profitable stock recommendations? (0 = not at all important; 6 = very important) a. Demand from your clients b. Your standing in analyst rankings c. Your reputation with management of the companies you follow d. Your stock recommendation as an input to your earnings forecast e. Your compensation f. Your job security g. Your job mobility 7. How likely are the following consequences to you of issuing a stock recommendation that is well below the consensus? (0 = very unlikely; 6 = very likely) a. Loss of access to management b. Being frozen out of the Q&A portion of future conference calls c. Damage to your employer s business relationship with the company d. Damage to your employer s business relationship with buy-side clients who hold stock in the firm e. An increase in your investing clients perception of your credibility f. Lower bonus/compensation g. Promotion less likely 8. How useful are the following for determining your stock recommendations? (0 = not at all useful; 6 = very useful) a. Your earnings forecast b. Other analysts stock recommendations c. Your industry knowledge d. Recent stock price performance e. Recent earnings performance f. Recent 10-K or 10-Q g. Management s earnings guidance h. Quality or reputation of management i. Earnings conference calls j. Private communication with management k. Primary research (e.g., channel checks, surveys, etc.) 9. How useful are the following types of direct contact with management for the purpose of generating your stock recommendations? (0 = not at all useful; 6 = very useful) a. Management s presentation on earnings conference calls 47