Education. Academic Positions. Honors

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1 REUVEN LEHAVY Curriculum vitae May 18, 2001 Address University of California Walter A. Haas School of Business 545 Student Services Building #1900 Berkeley, CA Phone: (510) Fax: (510) Education Undergraduate: University of Haifa, Haifa, Israel, B.A. in Economics and Accounting, 1989 Graduate: J.L. Kellogg Graduate School of Management, Northwestern University, M.S. in Accounting and Information Systems, June 1995, Ph.D. in Accounting and Information Systems, June 1997 Academic Positions July 1, 1996, Assistant Professor of Accounting, Walter A. Haas School of Business, University of California, Berkeley Honors Haas School of Business, University of California Finalist, Cheit Award for Best Teacher in Haas PhD Program, 1997 Club 6 (high teaching rating) 2 semesters, J.L. Kellogg Graduate School of Management, Northwestern University Doctoral Teaching Award, 1995 American Accounting Association Doctoral Consortium Fellow, 1993 "Big Ten" Accounting Doctoral Consortium Fellow, 1993 Northwestern University Scholarship, J.L. Kellogg Graduate School of Management Fellowship, Institute of Certified Public Accountants in Israel Special prize for being awarded a B.A. in Economics and Accounting with honors, 1989

2 University of Haifa, Haifa, Israel University Excellence Scholarships, 1986 and 1987 Professional Memberships Institute of Certified Public Accountants in Israel American Accounting Association Employment Kesselman & Kesselman CPAs (Largest CPA firm in Israel), Israel, CPA, Handled auditing and tax clients, Israeli Defense Force, Israel, Military Service, Teaching Experience Haas School of Business, University of California, Berkeley, California 2000 Corporate Financial Reporting (MBA Program), Financial Accounting (MBA Program), Financial Accounting (Undergraduate Program) 1997 Research Seminar in Accounting (Ph.D. Program) J. L. Kellogg Graduate School of Management Northwestern University, Illinois Accounting for Decision Making (The Master Program), Summer 1995 Introduction to Financial Accounting (The Master Program), Instructor in a oneweek course, September 1994 and 1995 Credit Analysis (Executive Master Program), Teaching Assistant, Financial Information for Management Planning and Control (Executive Master Program), Teaching Assistant, 1995 Accounting and Business Finance (Undergraduate Program), Teaching Assistant, Helsinki School of Economics and Business Administration, Helsinki, Finland Financial Accounting I, Instructor, 1996 University of Haifa, Haifa, Israel Teaching assistant in Advanced Managerial Accounting, Introduction to Accounting, Introductory Microeconomics, and Introductory Macroeconomics, LEHAVY 2 May 18, 2001

3 Research Interests Characteristics of financial analysts stock recommendations and earnings forecast Relations between firms earnings management, financial analysts earnings forecasts and capital markets Accounting choices by financially distressed firms Accounting based valuation models The relation between top executives compensation and accounting measures of performance Usefulness of accounting information to financial statement users Dissertation "Reliability of Fresh Start Financial Statements and the Association Between Firms Values and Accounting Numbers After Adoption of Fresh Start Reporting", Northwestern University, June 1997 Publications The Association between Firms Values and Accounting Numbers after Adoption of Fresh Start Reporting, Summer 1999, Journal of Accounting, Auditing, and Finance Can Investors Profit from the Prophets? Security Analyst Recommendations and Stock Returns, co-authored with Brad Barber, Maureen McNichols and Brett Trueman, April 2001, Journal of Finance Reporting Discretion and the Choice of Fresh Start Values in Companies Emerging From Chapter 11 Bankruptcy, 2001, Conditional Acceptance at the Review of Accounting Studies Working Papers An Empirical Analysis of Analysts' Target Prices: Short Term Informativeness and Long Term Dynamics, May 2001, co-authored with Alon Brav Prophets And Losses: Reassessing the Returns to Analysts Stock Recommendations, May 2001, co-authored with Brad Barber, Maureen McNichols and Brett Trueman Differences in Commercial Database Reported Earnings: Implications for Inferences in Research on Analyst Forecast Rationality, Earnings Management, and the Information Content and Value Relevance of Earnings, April 2000, co-authored with Jeff Abarbanell (under review at the Review of Accounting Studies) Are All Brokerage Houses Created Equal? Testing For Systematic Differences In The Performance of Brokerage House Stock Recommendations, LEHAVY 3 May 18, 2001

4 March 1999 (Revised March 2000), co-authored with Brad Barber and Brett Trueman (under review at the Journal of Financial and Quantitative Analysis). Biased Forecasts or Biased Earnings? The Role of Earnings Management in Explaining Apparent Optimism and Inefficiency in Analysts' Earnings Forecasts, April 1999, (Revised July 2000), co-authored with Jeff Abarbanell (under review at the Journal of Finance) Can Stock Recommendations Predict Earnings Management and Analysts' Earnings Forecast Errors, December 1998 (Revised May 1999), coauthored with Jeff Abarbanell (under review at the Journal of Accounting Research). Work in Progress An Analysis of the Intertemporal Characteristics of Firm-Specific Earnings Management Strategies "Are Analysts Stock Recommendations Consistent with their Earnings Forecasts? A Residual Income Approach", with Alon Brav Analysts Forecast Errors and Prior Earnings News: Firm Action or Analyst Underreaction?, co-authored with Jeff Abarbanell The Persistent of the Performance of Security Analysts Stock Recommendations co-authored with Brad Barber, Maureen McNichols and Brett Trueman Can Equity Market Motivated Earnings Management Predict Future Returns? The Association between Stock Recommendations, Earnings Management and Future Returns co-authored with Jeff Abarbanell Conference Participation Biased Forecasts or Biased Earnings? The Role of Earnings Management in Explaining Apparent Optimism and Inefficiency in Analysts' Earnings Forecasts, Presenter, Financial Economics and Accounting Symposium, University of Michigan, 2000 and Annual Meeting of the American Accounting Association, Philadelphia, August 2000 Moderator, Tenth Annual Conference of Financial Reporting, Center for Financial Reporting and Management, November 1999 "Can Stock Recommendations Predict Earnings Management and Analysts' Earnings Forecast Errors", Presenter, Annual Meeting of the American Accounting Association, San-Diego, August 1999 "Can Investors Profit from the Prophets? Security Analyst Recommendations and Stock Returns", The 5th Annual Accounting and Finance in Tel- Aviv, Presenter, August 1999 "Can Investors Profit from the Prophets? Security Analyst Recommendations LEHAVY 4 May 18, 2001

5 and Stock Returns", NBER Behavioral Finance Conference, Participant of an accepted paper, October 1998 The 4th Annual Accounting and Finance in Tel-Aviv, Discussant, August 1998 The Association between Firms Values and Accounting Numbers after Adoption of Fresh Start Reporting, Presenter, the 1998 JAAF-KPMG Conference, September 1998 Corporate Accounting Policy Seminar, 1997, Invited Participant Reporting Discretion and the Choice of Fresh Start Values in Companies Emerging From Chapter 11 Bankruptcy, Presenter, Annual Meeting of the American Accounting Association, August 1997 Invited Presentation New York University, January 2001 Hebrew University, December 2000 and December 1997 University of Michigan, October 2000 Tel Aviv University, June 2000 University of British Columbia, April 2000 Mellon Capital Management, San Francisco, December 1999 University of Utah, October 1999 University of Pennsylvania - Wharton School of Business, September 1999 Barclays Global Investors, San Francisco, May 1999 UCLA, April 1999 Stanford University, February 1999 Grants Committee on Research Grant, 1997, 1998, 1999, 2000 Junior Faculty Committee on Research Grant, 1997 Committee on Research Grant - travel, 1999, 2000 Referee for Serve as a reviewer for the Journal of Accounting Auditing and Finance, The Accounting Review, Review of Accounting Studies, Review of Financial Studies, and the Journal of Accounting Research. Coverage in Popular Press (see personal web site for articles) CBS MarketWathch.com (December 2000 and August 2000) Business Week (July 2000) Business Week (October 1999) The Motley Fool (February 1999) Financial Times (February 1999) LEHAVY 5 May 18, 2001

6 New York Times (January 1999) TheStreet.com (December 1998) LEHAVY 6 May 18, 2001

7 Reuven Lehavy Abstracts of Working Papers An Empirical Analysis of Analysts' Target Prices: Short Term Informativeness and Long Term Dynamics (2001, Alon Brav and Reuven Lehavy) Using a large database of analysts' target prices, we examine short-term market reactions to target price announcements and long-term comovement of target and stock prices. We find a significant market reaction to the information contained in analysts' target prices, both unconditional and conditional on contemporaneously issued stock recommendations and earnings forecast revisions. For example, the spread in average announcement day abnormal returns between positive and negative target price revisions is as high as 7 percent. We also find that stock recommendations and earnings forecast revisions are informative controlling for the information in target prices. Using a cointegration approach, we explore the long-term behavior of market and target prices and estimate the system's long-term equilibrium. In this equilibrium a typical firm's one-year ahead target price is 22 percent higher than its current market price. Finally, while market prices react to the information conveyed in analysts' reports, we show that any subsequent corrections towards the long-term equilibrium are, in effect, done by analysts alone. We provide evidence that the market understands the latter relationship and is therefore able to anticipate, at least partially, analysts' target price revisions. Prophets And Losses: Reassessing the Returns to Analysts Stock Recommendations (2001, Brad Barber, Reuven Lehavy, Maureen McNichols and Brett Trueman) After a string of years in which security analysts top stock picks significantly outperformed their pans, the year 2000 was a disaster. During that year the stocks least favorably recommended by analysts earned an annualized market-adjusted return of percent while the stocks most highly recommended fell percent, a return difference of almost 80 percentage points. This pattern prevailed during most months of 2000, regardless of whether the market was rising or falling, and was observed for both tech and non-tech stocks. While we cannot conclude that the 2000 results are necessarily driven by an increased emphasis on investment banking by analysts, our findings should add to the debate over the usefulness of analysts stock recommendations to investors. They should also serve to alert researchers to the possibility that excluding the year 2000 from their sample period could have a significant impact on any conclusions they draw concerning analysts stock recommendations.

8 Differences in Commercial Database Reported Earnings: Implications for Inferences Concerning Analyst Forecast Rationality, the Association between Prices and Earnings, and Firm Reporting Discretion (2000, Jeffery Abarbanell and Reuven Lehavy) Significant changes in mean and median analysts forecasts errors documented in recent studies are not synchronized across commercial forecast databases over time and are, in large part, a function of the definitions and procedures that determine the reported earnings component of earnings surprises. In this study we describe a number of complications researchers face in drawing inferences from forecast error metrics that are based on reported earnings numbers supplied by the major forecast data providers (FDPs) First Call, Zacks and I/B/E/S rather than metrics based on commonly used definitions of Compustat reported earnings. We show how differences across and intertemporal changes in FDP practices can have an important impact on inferences drawn in studies concerning analyst rationality, the association between stock prices and earnings news, firm earnings management, and stock market mispricing. We illustrate the importance of researchers choice of reported earnings data on inferences with examples from the literatures on earnings response coefficients (Bradshaw, Moberg and Sloan [2000]), analyst forecast rationality (Matsumoto [1999] and Brown [1999]), and value relevance of earnings (Collins, Maydew and Weiss [1997]). Are All Brokerage Houses Created Equal? Testing for Systematic Differences In The Performance of Brokerage House Stock Recommendations (2000, Brad Barber, Reuven Lehavy, Maureen McNichols and Brett Trueman) This paper compares the performance of analyst stock recommendations across brokerage houses. We document that the buy recommendations of the largest brokerage houses outperform those of the smallest, as one might expect. Somewhat surprisingly, though, the sell recommendations of the smaller brokers earn more than those of the larger ones. Ranking brokerage houses on the basis of prior-year performance, we find no reliable evidence that the abnormal return on the current recommendations of the top-ranked brokerage houses exceeds that of the bottom-ranked houses. Despite the performance rankings of brokers published in the popular press and the brokerage advertisements that tout prior performance, empirical evidence of performance persistence for brokerage house stock recommendations is weak at best. 8

9 Biased Forecasts or Biased Earnings? The Role of Reported Earnings in Explaining Apparent Bias and Over/Underreaction in Analysts Earnings Forecasts (2000, Jeffery Abarbanell and Reuven Lehavy) We demonstrate that distributions of analysts forecasts errors are characterized by two relatively small but statistically influential asymmetries. The first asymmetry is characterized as optimistic tails that are longer and fatter than pessimistic tails and the second asymmetry is characterized as a higher frequency of small pessimistic than small optimistic errors. These asymmetries are shown to disproportionally impact traditional statistics on which inferences concerning the existence and nature of unconditional and conditional (on prior news) analyst forecast errors are based. Observations that comprise these asymmetries are also shown to be associated with reported earnings components of the forecast error calculation that reflect, transparently, the nature of conservative accounting rules and managerial discretion in the application of these rules. A simple firm reporting bias-related explanation is offered to explain the existence of the two documented asymmetries in distributions of analysts forecast errors. This explanation may be consistent with refined versions of extant incentive and cognitive-based theories for why analysts deliberately or inadvertently bias their forecasts. However, it is also consistent with the possibility that practical obstacles prevent analysts from completely unraveling biases in reported earnings at the time they issue a forecast or the possibility that analysts are not motivated by investors to forecast components of earnings that result from strategic manipulations by firms. Can Stock Recommendations Predict Earnings Management and Analysts' Earnings Forecast Errors? (2000, Jeffery Abarbanell and Reuven Lehavy) We investigate whether the direction and magnitude of earnings management by firms is affected by the sensitivity of their stock prices to earnings news. We argue that firms with high price sensitivity to relatively small earnings surprises are more likely to direct their earnings management toward the target of meeting or beating analysts earnings forecasts than firms whose price sensitivity to earnings news is low. As a consequence, these firms are more likely to engage in either incomeincreasing or income-decreasing earnings management that leaves reported earnings equal to or above analysts forecasts and are less likely to engage in extreme income-decreasing earnings management than other firms. In contrast, firms with low price sensitivity to earnings news are 9

10 more likely to engage in reserve creating earnings management leading to optimistic forecast errors than other firms. Relying on analysts stock recommendations as a proxy for stock price and, hence, firms sensitivity to earnings news, we find evidence that strongly supports these predictions. We show that outstanding stock recommendations reflect firms incentives to manage earnings and, in turn, analysts ex post forecast errors. In particular, we find firms rated a Buy (Sell) are more (less) likely to engage in earnings management that leaves reported earnings equal to or slightly above analysts forecasts. In contrast, firms rated a Sell (Buy) are more likely to engage more (less) frequently in extreme income-decreasing earnings management that leads to extremely optimistic forecast errors. An important implication of our results is that analysts either cannot or are not motivated to anticipate perfectly earnings management by firms in response to recommendations they issue contemporaneously to their forecasts. Our findings provide direct evidence of purported, but heretofore, weakly documented equity market incentives for firms to manage earnings. The evidence also has important implications for the interpretation of prior findings in the literature on analysts forecasts and contracting incentives for earnings management. 10

11 Reuven Lehavy Abstracts of Published Papers The Association between Firms Values and Accounting Numbers after Adoption of Fresh Start Reporting, Summer 1999, Journal of Accounting, Auditing, and Finance This study examines the association between firms values and accounting numbers for 72 firms that adopted fresh start reporting (FSR) upon their emergence from Chapter 11 bankruptcy. It focuses on the effects of a misstatement in the reporting choice of the initial fresh start value of equity on the association between firms values and accounting numbers reported subsequently. Using a security valuation model, I derive an explicit relation between firms values and a measure of the misstatement in the fresh start equity. This model provides a theoretical value for a coefficient associating the misstatement with firms values under the null hypothesis that investors accurately undo the effects of the misstatement on subsequently reported numbers. I estimate this model for eight quarters after the adoption of FSR. The results of the regressions suggest that even two years after the emergence from Chapter 11 and the adoption of FSR, investors unravel the effects of the initial misstatement on book values and earnings reported subsequent to the adoption of FSR. The results also suggest that while investors appear to adjust for these effects, the magnitude of the adjustment is constant over time (in contrast to the predicted pattern of this adjustment). Can Investors Profit from the Prophets? Security Analyst Recommendations and Stock Returns, co-authored with Brad Barber, Maureen McNichols and Brett Trueman, April 2001, Journal of Finance In this paper we document that an investment strategy based on the consensus (average) recommendations of security analysts earns positive returns. For the period , a portfolio of stocks most highly recommended by analysts earned an annualized geometric mean return of 18.8 percent, while a portfolio of stocks least favorably recommended earned only 5.78 percent. (In comparison, an investment in a valueweighted market index earned an annualized geometric mean return of 14.5 percent.) Alternatively stated, purchasing stocks most highly recommended by analysts and selling short those least favorably recommended yielded a return of 102 basis points per month. The magnitude of this return is surprisingly large, and is far greater than the size effect (negative 16 basis points) and book-to-market effect (17 basis points) for the same period. Even after controlling for these two effects, as well as for price momentum, we show that the strategy of purchasing 11

12 stocks most highly recommended and selling short those least favorably recommended yielded a return of 75 basis points per month. These results are robust to partitions by time period and overall market direction, and are most pronounced for small and medium-sized firms. The abnormal returns also persist when we allow a lapse of up to 15 days before acting on the investment recommendations. There is no extant theory of asset pricing that explains these results. Reporting Discretion and the Choice of Fresh Start Values in Companies Emerging From Chapter 11 Bankruptcy, 2001, Conditional Acceptance at the Review of Accounting Studies Using a sample of 72 firms that adopted fresh start reporting upon their emergence from Chapter 11 bankruptcy, I test whether management estimates of fresh start equity values are misstated and whether the variation in such misstatements across firms is related to characteristics of the individual firms bankruptcy process. I predict that managers reporting choice of the fresh start equity value will, in general, reflect a tension between an incentive to overstate this value to promote the acceptance of the plan of reorganization and an incentive to understate this value to enhance future reported performance after the firm emerges from Chapter 11. I test whether the tendency to overstate the fresh start equity value is increasing in factors affecting the acceptance of the reorganization plan (i.e., bankruptcy claimants relative bargaining power) and whether the tendency to understate this value is related to factors affecting post-bankruptcy reported performance (i.e., the probability of future losses). I find that, relative to market value of equity immediately after emergence from Chapter 11, the fresh start equity value is, on average, understated by about 4 percent with an average absolute value of 11 percent. The difference between the fresh start equity value and market value also exhibits a large cross-sectional variation. I also find that, consistent with my first prediction, the crosssectional variation in the misstatement is increasing in the relative bargaining power of junior claimants (measured as the number of claimant classes allowed to vote on the reorganization plan, the amount of prebankruptcy debt, and the percentage ownership of former junior classes in the reorganized entity). In contrast to my second prediction, I find that the misstatement is also increasing in the likelihood of future reported losses, suggesting that management of firms that are more likely to experience postbankruptcy financial distress are more concerned with obtaining acceptance for their plan rather than with the effects of the fresh start equity value on postbankruptcy reported performance. Finally, I document that the misstatement in the fresh start equity value is negatively related to whether firms have undergone prepackaged bankruptcies, and positively related to replacement of a prebankruptcy CEO. 12