DO FINANCIAL ANALYSTS HELP RESOLVE INFORMATION PROBLEMS? Some Contrarian Evidence From the Restructuring of United Air Lines

This study investigates the role that financial analysts played in the 1994 restructuring of UAL Corporation (parent of United Air Lines). Under the restructuring employees agreed to $4.9 billion in wage and benefit concessions in exchange for 55% of UAL stock and seats on the board of directors. Although UAL’s shareholders eventually realized huge wealth gains, for almost two years after the transaction the stock market gave the company only partial credit for the concessions. During this entire period a majority of analysts were negative or indifferent about the buyout, and some misinterpreted key elements of the transaction. Management responded to the perceived information problem by devising a new method for reporting UAL’s performance that excluded a large non-cash charge for employees’ stock required under GAAP. * I would like to thank the following people for their helpful comments and suggestions: Paul Healy, Christopher Noe, and Krishna Palepu. I am extremely grateful to managers of UAL Corporation who generously spent time with me discussing the buyout, and who provided essential data and background information used in this study. The views and conclusions expressed in this study do not necessarily represent those of UAL Corporation or its employees. I owe a special debt to Jeremy Cott, who performed invaluable background research and data analysis, accompanied me on interviews, and shared many constructive opinions and insights with me during the writing of this paper. Finally I would like to thank the following organizations for supporting this research: I/B/E/S Inc., which provided data on analysts’ earnings forecasts; First Call, which provided full text analyst reports on UAL; and the Division of Research at Harvard Business School. Contact information Mailing address: Harvard Business School, Soldiers Field, Boston MA 02163. Phone: (617)495-6243. e-mail: [email protected]. Copyright © 1999 Stuart C. Gilson DO FINANCIAL ANALYSTS HELP RESOLVE INFORMATION PROBLEMS? Some Contrarian Evidence From the Restructuring of United Air Lines