Analysis of Intel and Ebay

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1. Discuss whether the analysts following Intel appear to have been influenced by any biases, both generally and in their reaction to Intel’s announcement in September 2000 (3 marks). 2. Discuss whether James Stewart’s assessment of eBay reflects any biases (3 marks). 3. In what ways are the events described at Intel and eBay similar and in what ways are they different (4 marks)? Question # 1 Brandt Cornell’s paper “Is the response of analyst to information consistent with fundamental valuation?” reveals that analyst recommendations are pro cyclical. As bad news arrives and the underlying price of the firm’s stock goes down , analyst downgrade company , the opposite effect arises when good news arrives. As Cornell…show more content…
Most rely on valuation heuristics involving P/E, PEG, and price-to-sales . The simplicity of using heuristic triggers dependence on valuation heuristics as an alternative for the fundamental valuation. P/E, PEG, and price-to-sales need few variables and use simple formulas. Therefore , the estimates are rather perceptive THUS subject to bias. The cause of these biases arise from weak assumption made towards P/E, PEG, and price-to-sales inputs. Lastly, analysts face agency conflicts. They must maintain relations with the managers of the firms they cover. For this reason, they are prone to pick valuation heuristics tactically, to reach the numbers that will satisfy managers. According to Hersh Shefrin, the solution to agency conflicts involves the arrangement of incentives between principal and agent ; Behavioral phenomena need to be tackled using de- biasing methods. Brandt Cornell research paper : “Is the response of analyst to information consistent with fundamental valuation?” suggests that one week after press release : • 26 of analyst revised their recommendations • 12 of them revised their previous recommendation , • 12 lowered their recommendation . • 4 of the analyst lowered their recommendation by more than one category. • One dropped Intel from a strong buy to under perform . Analyst , on average , viewed the company not as much appealing at the lower price. On the other hand, back in the end of August 2000, analyst were

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