I empirically studies the analytical abilities of both foreign and Korean domestic analysts, and their reports' impacts on stock prices. To compare the analytical abilities of foreign and Korean domestic analysts with regard to profit estimation, the ...
I empirically studies the analytical abilities of both foreign and Korean domestic analysts, and their reports' impacts on stock prices. To compare the analytical abilities of foreign and Korean domestic analysts with regard to profit estimation, the following are its major findings.
First, forecasted profits of both Korean domestic analysts and foreign analysts are higher than the actual profit. So they overestimated company profits.
Second, as a result of the t-test on difference in forecasting errors, Korean domestic analysts are more accurate than foreign analysts in forecasting sales, but foreign analysts are more accurate in forecasting net profits.
Third, we examined the relationship between forecasting errors and firm-specific variables by the cross-sectional regressions analysis. When market capitalization and CGS index are higher, forecasting errors for sales, operating profits and net profits are lower. When foreign investors' share holding ratio is higher, the forecasting error for operating profits and net profits is lower, but that for sales is higher.
Fourth, since the enforcement of Regulation Fair Disclosure on Nov. 2002, foreign and domestic analysts' overestimation is decreased. It means that forecasting precision was getting higher by the enforcement.
Furthermore, I compare the impacts of both foreign and Korean domestic analysts' reports on stock prices.
The first major finding is that when Korean and foreign analysts revise target prices upward, stock prices increase by 5.54% and 4.63%, respectively. But the downward revisions negatively affected stock prices. We found similar results for the revisions in stock recommendations.
Second, there is no significant difference between the two impacts. However, in the case of upward revisions of target prices, Korean analysts had a larger influence than foreign analysts during the pre-announcement period.
Third, even before the event date, stock prices continued to rise or fall depending upon upward or downward revisions in target prices. After the event date, however, there were no significant stock price changes. We interpret this result as implying that stock prices have already incorporated the information before the announcement, so there is an information leakage. When they revise stock recommendations, changes in stock prices were concentrated in a few days around the event date.
Fourth, when foreign analysts revise target price upward, foreign investors keep on buying stocks. In contrast, when foreign analysts revise target prices downward, there are no prior changes in the foreign investment position. However, when stock prices fall enough, foreign investors may also earn abnormal return by buying underpriced stocks subsequently.
Fifth, when foreign analysts revise stock recommendations upward, foreign investors may earn abnormal returns by buying stocks before the announcement. But it is strange that foreigners continue to buy stocks even when there are negative revisions and therefore stock prices fall.