PhD Defense by Chang Liu

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Area: Finance


Committee members: Dr. Narayanan Jayaraman (co-chair), Dr. Jonathan Clarke (co-chair), Dr. Suzanne Lee, Dr. Daniel Weagley, Dr. Clifton Green (Emory University)


Title: Three Essays on Analyst Research and Investment 


Essay 1: How Does the Stock Market Impact Investor Sentiment? —Evidence from Antidepressant Usage


This study examines the effects of local stock returns on antidepressant usage using the Truven Health MarketScan individual prescription drug data. There are three main findings. First, a one standard deviation decrease in local stock return increases local investor’s antidepressant usage by approximately 0.42 percent (an economic cost of approximately 671 million dollars) in the subsequent weeks than would have been in the absence of the decrease in stock return; in contrast, a stock price increase has no impact on antidepressant usage. Second, the effect of stock returns on antidepressant usage depends on an array of local socioeconomic characteristics including demographic structure, religiosity, political affiliation, political ideology, and personality traits. Third, local stock return fluctuations have significant effects on certain illnesses including insomnia, peptic ulcers, abdominal pains, and substance abuse which often result from depression. The results are consistent across a variety of robustness checks.


Essay 2: Are we back to the old ways? Impact of Expiration of the Global Research Settlement on Analyst Behavior 


In 2009, the Global Research Settlement (GRS), which was implemented to mitigate the conflict of interests between analysts and investors, expired. The GRS mandated the sanctioned banks to contract with Independent Research Firms (IRFs) that will make independent research available to the bank’s customers. To evaluate the impact of the GRS expiration we examine the analyst recommendations issued before and after the expiration. We find that after the GRS expiration, analysts employed at sanctioned banks are more likely to issue positive recommendations compared to the control group. More importantly, market reaction to downgrades issued by sanctioned banks are more informative following the expiration of GRS. This would imply that the market treats these downgrades as an unambiguous signal of deterioration of future prospects for these firms. Our findings are robust across a variety of alternative specifications. Our findings show sanctioned banks revert to pre-GRS practices where conflicts of interests threatened their credibility of research and calls into question the SEC’s decision to not codify the GRS into permanent rules.


Essay 3: Analysts from Independent Research Firms Covering the Financial Sector: Less Institutional Pressure and More Accurate Forecasts?


This paper examines the performance of analysts from Independent Research Firms (IRFs) and investment banks that cover firms in the financial sector. In particular, we evaluate six aspects of analyst performance: recommendation optimism, recommendation informativeness, earnings forecast optimism, earnings forecast accuracy, target price forecast optimism, and target price forecast accuracy. Using a sample of analyst recommendations and forecasts from 1994 to 2013, we document two important findings. First, compared to investment bank analysts, IRF analysts generally provide less biased, more informative, and more accurate recommendations and forecasts when covering firms in the financial sector. The only exception is the market reaction to pessimistic recommendations. The pessimistic recommendations issued by investment banks outperform those by IRFs. Second, conflicts of interests appear to play a significant role when investment bank analysts cover other bulge bracket investment banks. These results suggest that compared to their counterparts from IRFs, investment bank analysts are susceptible to institutional pressure related to underwriting business when covering firms in the financial sector.


  • Workflow Status: Published
  • Created By: Tatianna Richardson
  • Created: 05/09/2017
  • Modified By: Tatianna Richardson
  • Modified: 05/09/2017


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