Kai Wai HUI
Prof. Kai Wai HUI
Accounting and Law
MAcct Programme Director

3917 1687

KK 1213

Analysts’ Book Value Forecasts: Initial Evidence from the Perspective of Real-Options-Based Valuation

This study examines the usefulness of analysts' book value forecasts and the economic factors driving analysts' issuance of these forecasts. Guided by the real-options-based valuation model (ROM) of Zhang (2000), we explicitly link book value forecasts to the need for such information in valuation. We first establish that analysts' book value forecasts are superior to forecasts that are mechanically imputed from analysts' own earnings forecasts and those from random walk models and are incrementally informative beyond analysts' earnings, cash flow, and dividend forecasts. We then employ the ROM to explore the distinct information embedded in book value forecasts and analysts' decisions to issue these forecasts. Consistent with our expectations, we find that (i) book value forecasts convey growth information that is significantly correlated with ex ante indicators of real options, while analysts' earnings forecasts do not display this property; and (ii) analysts issue more book value forecasts when either growth options or, to a lesser extent, abandonment options are an important part of firm value. Our study sheds light on how analysts' book value forecasts are useful and under what circumstances analysts provide such information to meet investors' needs.

Federal Judge Ideology: A New Measure of Ex Ante Litigation Risk

Drawing on the political theory of judicial decision making, our paper proposes a new and parsimonious ex ante litigation risk measure: federal judge ideology. We find that judge ideology complements existing measures of litigation risk based on industry membership and firm characteristics. Firms in liberal circuits (the third quartile in ideology) are 33.5% more likely to be sued in securities class action lawsuits than those in conservative circuits (the first quartile in ideology). This result is stronger after the U.S. Supreme Court's ruling in the Tellabs case. We next show that the effect of judge ideology on litigation risk is greater for firms with more sophisticated shareholders and with higher expected litigation costs. Furthermore, judicial appointments affect litigation risk and the value of firms in the circuit, highlighting the economic consequences of political appointments of judges. Finally, using our new measure, we document that litigation risk deters managers from providing long‐term earnings guidance, a result that existing measures of litigation risk cannot show.