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 says , this leads to a positive feedback loop. Thus, if analyst recommendations influence investor actions , then such a feedback could strengthen price movements in both direction. recommendation on DCF valuation but instead relied on representativeness. Debondt and Tahler (1990 found a tendency towards overreaction in forecast changes and under reaction in forecast revisions. As in the case of Intel , managers responded that market had overreacted. Debondt and Tahler also found overreaction for positive forecast modifications and under reaction for negative forecast modifications. Finally, they also found that overreaction, under reaction and excess optimism increase with forecast horizon suggesting that the longer the prediction horizon, the larger the prediction bias. Furthermore, Cornell ,Conrad and Landsman (2000) prove that as the level of the market rises , individual stock becomes more sensitive to bad news.
Analyst who followed Intel appear not to have based their recommendation on DCF. According to Bloomberg ,virtually none of the28 analysts reports on Intel, examined DCF valuation analysis .Additionally,