Using hand-collected information, we find that analysts who own stock in a company they follow make more informative recommendations and exert more effort in covering the company. However, we also find that analysts with stock ownership issue more optimistic target price forecasts. These findings suggest that analysts’ stock ownership enhances the credibility of their recommendations by conveying their superior information, but also induces analysts to bias upwards their target price forecasts. Surprisingly, we find that 56% of analysts owning stock terminate their ownership while having a buy recommendation outstanding, suggesting a potentially widespread violation of the regulations on analysts’ research.

ABSTRACT Standard setters contend that fair value accounting yields the most relevant measurement for financial instruments. We examine this claim by comparing the value relevance of banks' financial statements under fair value accounting with that under current GAAP, which is largely based on historical costs. We find that the combined value relevance of book value of equity and income under fair value is less than that under GAAP. We also find that fair value income is less value-relevant than GAAP income because of the inclusion of transitory unrealized gains and losses in fair value income. More surprisingly, we find that book value of equity under fair value is not more value-relevant than under GAAP, due both to divergence between exit value and value-in-use and to measurement error in fair value estimates. Overall, our results suggest that financial statements under fair value accounting provide less relevant information for bank valuation than financial statements under current GAAP.