| In the first essay, we examine whether Wall Street research analysts show quality differentials in terms of their ability to forecast earnings accurately. Our results suggest that analysts show weak persistence in their firm-specific forecasting ability. Even though we find stronger statistical evidence of consistency at more aggregate levels, the economic magnitude of the differences in analyst performance is generally slight. Furthermore, we document that analysts associated with large brokerage firms, and with longer business experience, are more likely to be associated with accurate forecasts. However, the accuracy differential measured in terms of the dollar difference between actual and forecasted earnings is negligible.;In the second essay, we examine the question of whether public information decreases insider trading as it reduces the insider's informational advantage vis-a-vis other traders in the capital market. For this purpose, a speculative capital market setting is developed that is populated not only by an insider and a liquidity trader, but also by a noise trader. The main result shows that, as the information environment of the capital market improves with public information, the insider's trading gain decreases against the liquidity trader but it increases against the noise trader. Therefore, contrary to the common belief that public information should decrease the insider's trading profits, insider trading may become more profitable with more public information in the real world in which some traders are rational but others are subject to human limitations.;The third essay estimates firms' intrinsic value using the accounting-based valuation model and examines the predictive power of the estimated value for future stock returns. The key empirical issue of the model is to estimate future residual income. While most research has relied on the earnings forecasts of security analysts for future residual income, we attempt to estimate firms' future residual income using their past earnings history. This approach is based on our finding that firms exhibit persistence over time in their earnings (measured by ROA or ROE). We find that the resulting residual income-based value-to-price ratio helps to explain stocks even after controlling for book-to-market ratio effects. |
