Analysts and Information Gaps: Lessons from the Ual Buyout

Abstract

In addition to earnings forecasts and stock recommendations, analysts provide potentially useful information to investors in the form of written commentary and analysis. But how such fundamental research affects stock prices has been little studied. I investigate the role analysts' research played in the 1994 restructuring of UAL Corporation (parent of United Air Lines), in which employees acquired 55 percent of UAL stock in exchange for $4.9 billion in wage/benefit concessions. Focusing on the critical first two years of the buyout, my analysis suggests that analysts and investors, on average, initially gave the company little credit for the concessions. The transaction was controversial and complicated. Most analysts were negative or indifferent in their assessment of the deal. Some analysts also misinterpreted key terms of the deal. UAL managers responded by reporting an unconventional earnings measure that highlighted the financial concessions. UAL's stock price relative to the market and industry eventually doubled, but analysts' opinions of the deal did not change.

JEL Classification: G29, M41