Empirical research on information intermediaries: AIM -7323-001 - 2009S

Instructor
Stanimir Markov
Office: SOM 4.431
Ph: 972-883-4426
Fax: 972-883-6811
E-Mail: stan.markov@utdallas.edu
Office Hours: by appointment

Course description

The course surveys empirical research on information intermediaries: sell-side equity analysts, sell-side
debt analysts, credit rating agencies, and the financial press. Its objective is to broaden and deepen
students’ understanding of how information intermediaries operate and add value.

To achieve this objective, I have chosen papers that (1) capture the diversity of the circumstances in
which information is produced and disseminated, both in terms of organizational form: sell-side equity
analysts, debt analysts, credit rating agencies, the press, and information type: earnings forecasts, equity
recommendations, risk ratings, credit ratings, etc., and (2) emphasize general concepts and ideas useful
for understanding how beliefs are formed: loss function, Bayesian learning, and herding. In addition, in
choosing the papers I have tried to anticipate future research trends rather than report past research trends.

Every session two students will present two or three papers. A presentation should strive to communicate
the papers’ research questions, motivations, key results, contributions, research designs, etc. A
presentation can take the perspective of an author, discussant, or a referee. Authors tend to highlight the
paper’s strengths and contribution to the literature; discussants often adopt a big picture perspective and
discuss how the paper fits in different strands of research; referees, on the other hand, stress the paper’s
limitations and weaknesses, and make specific comments and suggestions on how to improve the paper.

Presenters are expected to explain all concepts, tools, and methods critical for understanding the paper’s
message. All students are expected to have read the assigned papers and participate in the discussion by
asking questions and making comments.

Also, all students will try to develop an original research idea related to the course content. The idea will
be presented at the end of the course. In addition to presenting the research idea, the students are expected
to turn in a document that would (1) communicate clearly the research question and the intended
contribution to the literature, and (2) convince the reader that the question is answerable, that is, key
research design issues have been anticipated and solved, data are available or can be gathered at a
reasonable cost, etc. The document will be distributed to me and other students at least 48 hours prior to
the presentation so that the audience can prepare for the presentation.

Read carefully John Cochrane’s Writing Tips to PhD students available on his web site:
http://faculty.chicagogsb.edu/john.cochrane/research/Papers/phd_paper_writing.pdf. The document
includes tips not only on how to write, but also on how to do empirical research and present, and is
offered by him to his students as a checklist. Make it your checklist.
Grading

Paper presentations 40%

Class participation 20%
Research idea presentation 20%
Research idea write-up 20%
Schedule

Sessions one through three introduce concepts and ideas useful for studying belief formation in general. Sessions four through seven focus
on equity analysts. Sessions eight through ten examine intermediaries other than equity analysts. Sessions eleven and twelve examine how
regulation (Regulation FD) affects the activities of various information intermediaries. The last three sessions are reserved for students’
presentations of their own research. The schedule and the reading list may change as the course progresses. Papers that will be presented
in class are in bold. Papers not in bold still need to be read by all students.

Session Date Topic and readings

1 14-Jan Loss function
Abarbanell and Bernard (1992)
DeBondt and Thaler (1990)
Basu and Markov (2004)
Elliott, Komunjer, and Timmermann (2005)
Note: The person presenting Basu and Markov (2004) will prepare between 5 and 10 slides on Elliott et al.’s (2005)
econometric approach to estimating loss function parameters.
2 21-Jan Learning and types of learning
Mikhail, Walther, and Willis (2003)
Chen, Francis, and Jiang (2005)
Markov and Tamayo (2006)
3 28-Jan Herding
Zitzewitz (2001)
Chen and Jiang (2006)
Jegadeesh and Kim (2008)
4 4-Feb Types of information provided by equity analysts
DeFond and Hung (2003)
Brav and Lehavy (2003)
Asquith, Mikhail, and Au (2005)
Lui, Markov, and Tamayo (2007)
5 11-Feb Differences among analysts
Jacob, Lys, and Neale (1999)
Frankel, Kothari, and Weber (2006)
Fang and Yasuda (2008)
6 18-Feb Incentives
Lim (2001)
Cowen, Groysberg, and Healy (2006)
Groysberg, Healy, and Maber (2008)
7 25-Feb Coverage decision
Bhushan (1989) and O'Brien and Bhushan (1990)
Irvine (2004)
8 4-Feb Credit rating agencies
Blume, Lim, and Mackinlay (1998)
Beaver, Shakespeare, and Soliman (2006)
Hand, Holthausen, and Leftwich (1992)
Kaplan (1979)
9 11-Feb Sell-side debt analysts
Gurun, Johnston, and Markov (2008)
De Franco, Vasvari, and Wittenberg Moerman (2008)
Johnston, Markov, and Ramnath
Note: The person presenting Gurun, Johnston, and Markov (2008) will prepare between 5 and 10 slides on Johnston,
Markov, and Ramnath.
10 25-Mar Media
Huberman and Regev (2001)
Bushee et al. (2007)
Tetlock (2007)
 Core, Guay, and Larcker (2008)
11 1-Apr Regulation
Mohanram and Sunder (2006)
Gintschel and Markov (2004)
12 8-Apr Regulation
Jorion, Liu, and Shi (2005)
Francis, Nanda, and Wang (2006)
13 15-Apr Presentations
14 22-Apr Presentations
15 29-Apr Presentations
 References

Abarbanell, Jeffry S., and Victor L. Bernard. 1992. Tests of analysts' Overreaction/Underreaction
to earnings information as an explanation for anomalous stock price behavior. The Journal
of Finance 47, (3, Papers and Proceedings of the Fifty-Second Annual Meeting of the
American Finance Association, New Orleans, Louisiana January 3-5, 1992) (Jul.): 1181-
207.

Asquith, Paul, Michael B. Mikhail, and Andrea S. Au. 2005. Information content of equity
analyst reports. Journal of Financial Economics 75, (2) (2): 245-82.

Basu, Sudipta, and Stanimir Markov. 2004. Loss function assumptions in rational expectations
tests on financial analysts’ earnings forecasts. Journal of Accounting and Economics 38,
(12): 171-203.

Beaver, William H., Catherine Shakespeare, and Mark T. Soliman. 2006. Differential properties
in the ratings of certified versus non-certified bond-rating agencies. Journal of Accounting
and Economics 42, (3) (12): 303-34.

Bhushan, Ravi. 1989. Collection of information about publicly traded firms : Theory and
evidence. Journal of Accounting and Economics, 11, (2-3) (7): 183-206.

Blume, Marshall E., Felix Lim, and A. Craig Mackinlay. 1998. The declining credit quality of
U.S. corporate debt: Myth or reality? The Journal of Finance 53, (4, Papers and
Proceedings of the Fifty-Eighth Annual Meeting of the American Finance Association,
Chicago, Illinois, January 3-5, 1998) (Aug.): 1389-413.

Brav, Alon, and Reuven Lehavy. 2003. An empirical analysis of analysts' target prices: Short-
term informativeness and long-term dynamics. The Journal of Finance 58, (5): 1933-68.

Bushee, Brian J., John E. Core, Wayne R. Guay, and Sophia Jihae W. Hamm. 2007. The role of
the business press as an information intermediary. SSRN eLibrary.

Chen, Qi, Jennifer Francis, and Wei Jiang. 2005. Investor learning about analyst predictive
ability. Journal of Accounting and Economics 39, (1) (2): 3-24.

Chen, Qi, and Wei Jiang. 2006. Analysts' weighting of private and public information. Review of
Financial Studies 19, (1): 319-55.

Core, John E., Wayne Guay, and David F. Larcker. 2008. The power of the pen and executive
compensation. Journal of Financial Economics 88, (1) (4): 1-25.
Cowen, Amanda, Boris Groysberg, and Paul Healy. 2006. Which types of analyst firms are more
optimistic? Journal of Accounting and Economics, 41, (1-2) (4): 119-46.

De Franco, Gus, Florin P. Vasvari, and Regina Wittenberg Moerman. 2008. The informational
role of bond analysts. SSRN eLibrary.

DeBondt, Werner, and Richard H. Thaler. 1990. Do security analysts overreact? The American
Economic Review 80, (2, Papers and Proceedings of the Hundred and Second Annual
Meeting of the American Economic Association) (May): 52-7.

DeFond, Mark L., and Mingyi Hung. 2003. An empirical analysis of analysts’ cash flow
forecasts. Journal of Accounting and Economics 35, (1) (4): 73-100.

Elliott, Graham, Ivana Komunjer, and Allan Timmermann. 2005. Estimation and testing of
forecast rationality under flexible loss. Review of Economic Studies 72, (4): 1107-25.

Fang, Lily H., and Ayako Yasuda. 2008. Are stars' opinions worth more? the relation between
analyst reputation and recommendation values.

Francis, Jennifer, Dhananjay Nanda, and Xin Wang. 2006. Re-examining the effects of
regulation fair disclosure using foreign listed firms to control for concurrent shocks.
Journal of Accounting and Economics 41, (3) (9): 271-92.

Frankel, Richard, S. P. Kothari, and Joseph Weber. 2006. Determinants of the informativeness of
analyst research. Journal of Accounting and Economics 41, (1-2) (4): 29-54.

Gintschel, Andreas, and Stanimir Markov. 2004. The effectiveness of regulation FD. Journal of
Accounting and Economics 37, (3) (9): 293-314.

Gurun, Umit G., Rick M. Johnston, and Stanimir Markov. 2008. The informational effects of
sell-side debt research on debt and equity markets. SSRN eLibrary.

Hand, John R. M., Robert W. Holthausen, and Richard W. Leftwich. 1992. The effect of bond
rating agency announcements on bond and stock prices. The Journal of Finance 47, (2)
(Jun.): 733-52.

Huberman, Gur, and Tomer Regev. 2001. Contagious speculation and a cure for cancer: A
nonevent that made stock prices soar. The Journal of Finance 56, (1) (Feb.): 387-96.

Irvine, P. J. 2004. Analysts' forecasts and brokerage-firm trading. Accounting Review 79, (1):
125-49.

Jacob, John, Thomas Z. Lys, and Margaret A. Neale. 1999. Expertise in forecasting performance
of security analysts. Journal of Accounting and Economics, 28, (1) (11): 51-82.
Jegadeesh, Narasimhan, and Woojin Kim. 2008. Do analysts herd? an analysis of
recommendations and market reactions.

Johnston, Rick, Stanimir Markov, and Sundaresh Ramnath. Sell-side debt analysts. Journal of
Accounting and Economics In Press, Accepted Manuscript, .

Jorion, Philippe, Zhu Liu, and Charles Shi. 2005. Informational effects of regulation FD:
Evidence from rating agencies. Journal of Financial Economics 76, (2) (5): 309-30.

Kaplan, . 1979. Statistical models of bond ratings: A methodological inquiry. The Journal of
Business 52, (2).

Lim, Terence. 2001. Rationality and analysts' forecast bias. The Journal of Finance 56, (1)
(Feb.): 369-85.

Lui, Daphne, Stanimir Markov, and Ane Tamayo. 2007. What makes a stock risky? evidence
from sell-side analysts' risk ratings. Journal of Accounting Research 45, (3): 629-65.

Markov, Stanimir, and Ane Tamayo. 2006. Predictability in financial analyst forecast errors:
Learning or irrationality? Journal of Accounting Research 44, (4).

Mikhail, Michael B., Beverly R. Walther, and Richard H. Willis. 2003. The effect of experience
on security analyst underreaction. Journal of Accounting and Economics 35, (1) (4): 101-
16.

Mohanram, Partha, and Shyam Sunder. 2006. How has regulation FD affected the operations of
financial analysts? Contemporary Accounting Research 23, (2).

O'Brien, Patricia C., and Ravi Bhushan. 1990. Analyst following and institutional ownership.
Journal of Accounting Research 28, (, Studies on Judgment Issues in Accounting and
Auditing): 55-76.

Tetlock, Paul. 2007. Giving content to investor sentiment: The role of media in the stock market.
The Journal of Finance 62, (3).

Zitzewitz, Eric W. 2001. Measuring herding and exaggeration by equity analysts and other
opinion sellers. SSRN eLibrary.
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