Analyst Following, Institutional Investors and Pricing of Future Earnings

Abstract

This paper examines the role of sophisticated investors in pricing future earnings. Using the future earnings response coefficient (FERC) model recently developed by Ettredge et al. (2005), we test the effect of analyst following and institutional ownership on the informativeness of stock returns on future earnings. We find that the informativeness of stock returns on future earnings, measured as the future earnings response coefficient, increases with the analyst following and institutional investors. We also investigate how the recently introduced Regulation Fair Disclosure in Korea affects the informativeness of stock returns on future earnings and its relation with analyst following and institutional investors. The results show that the regulation decreases the future earnings response coefficient in general and its relation with the analyst following, suggesting that their superior ability is impaired after the regulation. Our main results do not change much after controlling for the change in analyst following after the regulation and additional variables such as firm size, growth, earnings variability and accounting conservatism.

Keywords: Analyst following, Institutional investors, Future Earnings Response Coefficients, Regulation Fair Disclosure

JEL Classification: G14, G18, G30