Thursday, March 10, 2011
Professor’s research explores finance complexities, their impacts
In an era when the health of Wall Street has taken on increasingly greater significance to the world economy, an SBA professor is shedding light on the dynamics that influence it.
Hong Qian, assistant professor, finance, researches securities issuance and analyst forecasts. Her findings offer valuable insight to Wall Street leaders into the complexity of financial markets and the dynamics of corporate decision making.
Straight from the headlines
In her latest project, Qian examines how the release of industry rivals' earnings news during the initial public offering book-building period affects a firm's process of going public.
“We showed that the news contains valuable information for both the issuer and investors to value the IPO,” says Qian who co-authored the paper with Tony Ruan, assistant professor, finance, Xiamen University in the Fujian Province of China.
A typical IPO firm is small and unknown to the public. It is usually susceptible to competition from other companies in the industry. While GM was not a typical IPO, it is a fitting example based on intense local interest.
“In GM’s case, suppose Ford made an earnings announcement when GM was on the road show, and it beat the analyst forecasts. What would that tell about GM? Investors might think Ford is doing so well that it could imply that GM’s sales may be negatively affected," Qian explains. "So GM might have had to lower the offer price, and investors may not have reacted as enthusiastically as they did on GM’s IPO.”
Analyzing the analysts
Qian has long been intrigued by factors that influence financial relationships. Her studies reflect that interest while focusing on the complex dynamics of the financial world. She has studied and published papers on the relationship between financial analysts and investors, the impact of corporate research and development on equity issuance, and the difference in liquidity changes between public offerings and private placements of stock.
“Financial analysts play an important role in disseminating information to investors through their forecasts,” Qian says. “It was interesting to see whether financial analysts do a good job in their forecasts, particularly how analyst forecasts are affected by investor perception, and whether or not investors listen to the forecasts."
Before 1999 forecasts were generally optimistic, or higher than the company's actual earnings. In contrast, today, companies aim to beat the forecasts because investors pay more attention to them.
“If companies miss the forecasts, they will be punished by investors, and their stock prices will be hit hard,” Qian says. “We call this analyst optimism. It measures how much analyst forecasts deviate from actual earnings. It is analyst pessimism if forecasts are lower than actual earnings.”
Qian learned the level of analyst optimism has varied over time. Surprisingly, the health of the economy does not have a significant impact on analyst optimism. But investor sentiment plays a considerable part in shaping the analysts' viewpoint.
“When investor sentiments were high, analysts were more optimistic and vice versa,” Qian says.
In a collaborative project with SBA colleagues Qian took another look at market forecasts further solidifying the tie between investors and analysts.
The group -- comprised of Qian, Joe Callaghan, professor of accounting; Austin Murphy, professor of finance; and Mohinder Parkash, professor of accounting and chair, Department of Accounting and Finance -- evaluated the market’s ability to incorporate accurate forecasts into stock prices.
“We found that even though analyst forecasts were not very accurate, they did affect stock prices, which means that investors did listen to analysts’ opinions,” Qian says.
Exploring equity issuance
In another study, she focuses on companies’ practice of issuing securities to raise external capital by studying the interaction between corporate equity issuance decisions and financial markets.
In a paper slated for the February, 2011 Financial Review, she studied liquidity changes to a publicly traded company’s stock around public offerings and private placements. Unlike what happens to public offering issuers, issuers that resort to the private equity market are not expected to experience substantial improvement in liquidity of their stocks.
“I found that with a public offering, typically more analysts would start to cover the company’s stock. Analysts played an important role in disseminating the information and raising investor attention to facilitate trading and lower transaction costs,” Qian notes.
In a collaborative project with colleagues from other institutions, Qian explores how a company’s investments in R&D influences investors’ reaction to its equity issuance.
“We found investors favor high-tech companies that invested a lot in R&D right before the equity issuance announcements, but not for low-tech companies that chose to do so. It seems that market believes high-tech’s R&D is more valuable,” says Qian who co-authored the study with Ke Zhong, assistant professor, accounting, Central Washington University, and Zhaodong (Ken) Zhong, assistant professor, finance, Rutgers.
Driven to explore
Qian is not slowing the steady pace of research, writing and presenting she has set since joining the SBA in 2006. She has several more papers in the works. Her collaborations with others have allowed her not only to delve into more ambitious projects, but also to bring the vast research efforts of the SBA to a broader audience.
By Flori Meeks