Limited Attention to Detail in Financial Markets

We show that analyst valuations became less accurate and more pessimistic following a large drop in accounting earnings that did not reveal new information about firm value.

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Zacharias Sautner (Frankfurt School of Finance & Management)

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IWH conference room, Leipziger Straße 100

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Zacharias Sautner is Professor of Finance at Frankfurt School of Finance & Management. He was previously Associate Professor of Finance (with tenure) at the University of Amsterdam and Director of the Corporate Finance and Banking program at Duisenberg school of finance. Prior to that he worked as Research Fellow in Finance at the Saïd Business School of the University of Oxford. Zacharias Sautner works in the area of empirical corporate finance and focuses on corporate governance, executive compensation, M&A, internal capital markets, and bankruptcy.

Programm

We show that analyst valuations became less accurate and more pessimistic following a large drop in accounting earnings that did not reveal new information about firm value. FAS 123-R required firms to begin expensing option compensation in income statements, instead of disclosing costs only in footnotes. We exploit that FAS 123-R’s compliance dates were staggered quasi-randomly based on firms’ fiscal year ends. Firms that expensed options were more likely to miss earnings forecast, relative to firms that did not yet expense options. Analysts also more often revised down these firms’ recommendations, resulting in large market value drops. Our results are consistent with the limited attention hypothesis: analysts and investors overvalue firms when value-relevant information is less accessible.