Avani Sebastian and Yudhvir Seetharam
Sell-side equity analysts are key information intermediaries, although prior literature has found that they exhibit behavioural biases. The aim of this study is to describe the…
Abstract
Purpose
Sell-side equity analysts are key information intermediaries, although prior literature has found that they exhibit behavioural biases. The aim of this study is to describe the process followed by analysts in formulating recommendations and to identify the behavioural biases that are likely to influence the process.
Design/methodology/approach
Semi-structured interviews were conducted with 20 sell-side equity analysts in an emerging market. This direct interaction allowed the researchers to gain insights into analysts’ use of information, related challenges and proclivity for biases.
Findings
The authors find evidence of intentional and spurious herding, availability, overconfidence and the disposition effect. In spite of the volume of information in corporate reports, a key source of new information is direct interaction with management, where analysts use their intuition or “gut feel”. Weary of the possibility of financial misstatement, they use these direct interactions to assess management’s trustworthiness. The authors find reputational motivations for the safety of herding around the broker consensus. Declining coverage of JSE-listed companies is therefore concerning for the analysts.
Originality/value
The study contributes to the limited qualitative research on analyst bias in the emerging South African economy. In addition, the focus on the information context of analysts juxtaposes corporate reporting and behavioural finance research to provide insights on the use of various sources of information for decision-making.
Details
Keywords
An understanding of the role of decision-making has been emphasised since the seminal works on human information processing and professional judgements by accountants. The…
Abstract
Purpose
An understanding of the role of decision-making has been emphasised since the seminal works on human information processing and professional judgements by accountants. The interest in these topics has been reignited by the increasing digitisation of the financial reporting and auditing processes. Whilst the behavioural research on accounting is well-established, the application of seminal works in cognitive psychology and behavioural finance is lacking, especially from recent research endeavours. The purpose of this paper is to provide a synthesis of theories relating to accounting behavioural research by evaluating them against the theories of cognitive psychology.
Design/methodology/approach
Using theory synthesis, this research draws seemingly isolated strands of research into a coherent framework, underpinned by cognitive psychology.
Findings
Evidence from accounting and auditing behavioural research is largely consistent with the psychology and finance research on cognitive limitations and errors. There remains a lacuna in accounting behavioural research on debiasing techniques. Such research, if underpinned by a single, cohesive theoretical framework, is likely to have practical relevance.
Research limitations/implications
The current research has theoretical implications for the accounting decision-making and uncertainty research. Areas for future research, based on identified gaps in the current accounting behavioural research, are also proposed.
Details
Keywords
Sanjay Dhamija and Reena Nayyar
After reading the case, the students shall be able to explain the concept of insider trading and differentiate between illegal insider trading and legal insider trading, business…
Abstract
Learning outcomes
After reading the case, the students shall be able to explain the concept of insider trading and differentiate between illegal insider trading and legal insider trading, business ethics, financial institutions, financial markets and accounting; to interpret the legal framework for prevention of insider trading; to identify the role and significance of the market regulator, Securities and Exchange Board of India (SEBI), in detecting financial crimes such as insider trading; to demonstrate the association between information, stock trading and stock prices within the framework of efficient markets; and to appraise the ethical dilemma in a family-owned firm, where the family members of the promoter group are alleged to have indulged in a financial crime.
Case overview/synopsis
The case revolves around allegations of insider trading against the promoter and the promoter group of the family owned and controlled firm, Lux Industries Limited. On January 24, 2022, the SEBI, the regulator of securities markets in India, accused Udit Todi, the Executive Director of Lux Industries Limited, of engaging in insider trading through a chain of 14 connected parties. Udit Todi was also the son of the Managing Director, Pradip Kumar Todi, and the nephew of the Executive Chairman, Ashok Kumar Todi. In its interim order, SEBI alleged a breach of insider trading regulations by a group of 14 connected entities that had built up long positions starting from May 21, 2021, before the quarterly financial results (Q4) and the annual results of the financial year (FY) 2021 in the equity shares of Lux Industries Limited, with its registered office in Kolkata, India, were announced. Subsequently, they squared off the long positions to make a profit of ₹29.43m. To restore the confidence of the investors, the Executive Chairman, Ashok Kumar Todi, needed to review the matter expeditiously and impartially. Taking into consideration the family ties of the accused, it was not going to be an easy task, yet, it had to be done. The case highlights the role of the regulator, SEBI, in unearthing financial frauds such as insider trading in an emerging market such as India.
Complexity academic level
Postgraduate programs in management, Executive education programs.
Supplementary materials
Teaching notes are available for educators only.
Subject code
CSS 1: Accounting and Finance