The available evidence indicates that, in almost all cases, foreign direct investment FDI is beneficial for investing firms and host countries, and the importance of multinational corporations MNCs in the world economy will continue to expand The joint task force focused its study on high-technology and other manufacturing industries, because those industries are and will continue to be central to U. Through direct investment, U. Although by Japan had lifted most formal restrictions, inward direct investment has remained very low because of the legacy of those restrictions and continuing informal barriers, as well as the current high cost structure in Japan that discourages direct investment in manufacturing.
In this regard, in their study, "Analyst quality, optimistic bias, and reactions to major news," Cao and Kohlbeck sought to determine whether those characteristics that are congruent with superior analysts are also related to reductions in the asymmetric response to such stock recommendations.
To this end, Cao and Kohlbeck revisited previous research in this area to identify analyst and brokerage-firm characteristics that are characteristic of superior ability of financial analysts to generate accurate stock recommendations.
This paper reviews Cao and Kohlbeck's study concerning analyst quality, optimistic bias, and reactions to major news, followed by a critical analysis of the authors' conclusions. Finally, a summary of the research and salient findings are presented in the conclusion.
Review and Discussion Analyst Quality, Optimistic Bias and Reactions to Major New According to Cao and Kohlbeckstudying the quality of the financial analyses provided by analysts is an important and timely enterprise today Investment recomendations essay such characteristics are closely associated with the asymmetric response of stock recommendations to public information shocks.
Likewise, Mokoaleli-Mokoteli, Taffler and Agarwal report that, "Although research attests to the importance of financial analysts for the efficient functioning of the capital markets, in the recent past strong doubts have been expressed about the credibility and objectivity of their stock recommendations" p.
Moreover, a number of issues have been advanced concerning sell-side analysts' recommendations that were almost Panglossian in their predictions, but which in reality did not appear to mirror their honest views concerning the reported stocks.
Likewise, Cao and Kohlbeck also confirm that previous researchers have identified a degree of asymmetry between analysts' response concerning large positive vs.
According to these researchers, "Analysts respond much more strongly to large negative price shocks and effectively do not respond to large positive price shocks" p. What is known, though, is that "Overoptimism is the tendency to overestimate the likelihood of desired outcomes and underestimate the frequency of unfavorable events and is one of the most cited biases in the literature on analysts' forecasts and recommendations" Mokoaleli-Mokoteli et al.
To help fill this gap in the body of knowledge concerning asymmetrical responses, Cao and Kohlbeck investigated whether financial analysts' characteristics are associated with their asymmetric response of stock recommendations between positive and negative information shocks.
These researchers also speculate that those attributes that serve to differentiate superior analysts from their less adept counterparts are positively related to the timely promulgation of bad news concerning a company.
Consequently, Cao and Kohlbeck predict that the asymmetric response will be less among superior analysts. In this regard, based on the preparatory analyses, Cao and Kohlbeck speculated that the asymmetric response is less for superior analysts for two fundamental reasons: Superior analysts have a reputation advantage to attract new banking clients.
As a result, other analysts are more likely to avoid negative views to attract new business. A sufficiently large negative shock permits these other analysts to downgrade while still maintaining an optimistic bias.
Superior analysts have incentives to reveal their negative private information to the market. Compared to analysts identified as providing no upgrade, superior analysts can provide a relative upgrade but still be relatively less optimistic in reaction to a negative price shock.
Pursuant to the foregoing, Cao and Kohlbeck anticipated that they would find less asymmetry for analysts that demonstrated superior attributes. Based on a sample of large price changes, the results obtained by Cao and Kohlbeck provide support for previous research by identifying asymmetry in the analyst response to large positive and large negative information shocks.
Perhaps even more significantly, Cao and Kohlbeck also found that the proxy for the quality of analyst recommendations was inversely related to the probability of recommendation downgrades after large negative price shocks, suggesting a reduction in asymmetry as analyst quality improves.
Furthermore, Cao and Kohlbeck maintain that such asymmetrical reductions are fueled by analysts in the upper decile. In this regard, Cao and Kohlbeck report that, "Analysts in the upper decile of analyst quality do not appear to respond to either positive or negative news events, whereas the majority analysts in lower deciles of analyst quality exhibit varying degrees of asymmetric response"p.
Subsequent analysis by Cao and Kohlbeck determined that the reductions that they identified in the asymmetry only existed in those situations where analysts have negative private information based on their own earnings forecasts; these researchers, though, did not identify any support for the proposition that such observed asymmetry is associated with any specific banking affiliation.
The results of the study by Cao and Kohlbeck are highly congruent with previous research that found asymmetry was associated with a general information processing bias among those analysts who were designated as being of lesser quality.
According to these researchers, "Importantly, such a bias affects superior analysts less due, at least in part, to their effectiveness in translating earnings forecasts into recommendations. For instance, according to Cao and Kohlbeck, "Bad news creates uncertainty in firms' information environment and thus presents traders with an opportunity to gain from information acquisition that would mitigate the uncertainty.Investment products and services are offered through Wells Fargo Advisors.
Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC (WFCS) and Wells Fargo Advisors Financial Network, LLC, Members SIPC, separate registered broker-dealers and non-bank affiliates of Wells Fargo & Company.
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