Business strategy,stock price informativeness,and analyst coverage efficiency

We examine how business strategy affects stock price informativeness which in turn influences analyst coverage efficiency. Using stock price synchronicity and the probability of informed trading as proxies for stock price informativeness, we show that stock prices of prospectors are less informative than those of defenders. Next, we explore two channels through which business strategy influences analyst coverage efficiency. We first test and find support for an information transfer channel, i.e., the higher stock price synchronicity of prospectors facilitates more information transfer by analysts, resulting in higher analyst coverage efficiency of prospectors than defenders. Next, we test and find support for an informed trading channel, i.e., the higher probability of informed trading on stocks of defenders intensifies competition between informed traders and analysts. Such competition adversely affects analyst coverage efficiency, leading to lower analyst coverage efficiency of defenders than prospectors. Our findings are robust to an array of robustness checks including 2SLS/IV tests, differences‐in‐difference tests, and high‐tech industry sensitivity analyses.     

Investor attention and information diffusion from analyst coverage

This study examines the impact of investor attention and analyst coverage on the diffusion of information. Using trading turnover as a proxy for investor attention, the results show that attention is crucial to the information diffusion from financial analysts. The effect of analyst coverage on improving stock synchronicity is greater when investors are more attentive. Firms with less analyst coverage rely more heavily on investor attention to assimilate information. The lead–lag effect in high and low analyst-following firms is driven by the relative more attention given to firms that have high analyst coverage.     

Analyst Coverage and Intangible Assets

This study examines the relation between analysts' incentives to cover firms and the extent of their intangible assets. Because intangible assets typically are unrecognized and estimates of their fair values are not disclosed, absent analyst coverage firms with more intangible assets likely have less informative prices. Accordingly, we expect analysts have greater incentives to cover firms with more intangible assets and, thus, predict they have higher analyst coverage. As predicted, we find that analyst coverage is significantly greater for firms with larger research and development and advertising expenses relative to their industry, and for firms in industries with larger research and development expense. We also predict and find that analyst coverage is increasing in firm size, growth, trading volume, equity issuance, and perceived mispricing, and is decreasing in the size of the firm's analysts' brokerage houses and the effort analysts expend to follow the firm. These findings indicate that analyst coverage depends on private benefits and costs of covering a firm. We also test hypotheses related to analyst effort. We predict and find that analysts expend greater effort to follow firms with more intangible assets, after controlling for other factors associated with analyst effort. Our evidence indicates that intangible assets, most of which are not recognized in firms' financial statements, are associated with greater incentives for analysts to cover such firms, and greater costs of coverage. An open question is whether financial statement recognition of intangible assets could more efficiently provide information about such assets to investors.     

Getting Attention Through Corporate Philanthropy

This study investigates whether firm donations will attract attention for firms without analyst coverage. We find that: (1) the donations from firms without analyst coverage attract more attention from analysts, (2) donations from firms without analyst coverage improve stock liquidity and institutional holdings at least in the short run, and (3) donations from firms without analyst coverage are positively and significantly related to the future performance of firms compared with those from firms covered by analysts. This study contributes to the understanding of the influence of analysts on firms and the strategic motivations of corporate philanthropy.     

Does the Scope of the Sell‐Side Analyst Industry Matter? An Examination of Bias,Accuracy, and Information Content of Analyst Reports

We examine changes in the scope of the sell‐side analyst industry and whether these changes impact information dissemination and the quality of analysts’ reports. Our findings suggest that changes in the number of analysts covering an industry impact analyst competition and have significant spillover effects on other analysts’ forecast accuracy, bias, report informativeness, and effort. These spillover industry effects are incremental to the effects of firm level changes in analyst coverage. Overall, a more significant sell‐side analyst industry presence has positive externalities that can result in better functioning capital markets.     

Does international cross-listing improve the information environment

We investigate whether cross-listing in the U.S. affects the information environment for non-U.S. stocks. Our findings suggest cross-listing has an asymmetric impact on stock price informativeness around the world, as measured by firm-specific stock return variation. Cross-listing improves price informativeness for developed market firms. For firms in emerging markets, however, cross-listing decreases price informativeness. The added analyst coverage associated with cross-listing likely explains the findings in emerging markets, rather than changes in liquidity, ownership, or accounting quality. Our results indicate that the added analyst coverage fosters the production of marketwide information, rather than firm-specific information.     

Analyst coverage and corporate tax aggressiveness

We examine the impact of analyst coverage on corporate tax aggressiveness. To address endogeneity concerns, we perform a difference-in-differences analysis using a setting which causes exogenous decreases in analyst coverage. Our tests identify a negative causal effect of analyst coverage on tax aggressiveness, suggesting that higher analyst coverage constrains corporate tax aggressiveness. Further cross-sectional variation tests find that this constraining effect on tax aggressiveness is more pronounced in firms with lower investor recognition and firms with more opaque information environments. Our results are consistent with the notion that higher analyst coverage increases the visibility of aggressive tax planning behavior as well as heightens analysts’ demand for more transparent information, which in turn reduces tax aggressiveness.     

Analyst following,staggered boards,and managerial entrenchment

We use agency theory to explore how analyst coverage is influenced by the managerial entrenchment associated with the staggered board. The evidence suggests that firms with staggered boards attract significantly larger analyst following. We also document that firms with staggered boards experience less information asymmetry. Staggered boards insulate managers from the discipline of the takeover market. Entrenched managers are well-protected by the staggered board and have fewer incentives to conceal information, resulting in less information asymmetry. The more transparent information environment facilitates the analyst’s job. As a consequence, more analysts are attracted to firms with staggered boards. We also document the beneficial role of analyst coverage in improving firm value. Our results confirm the notion that analysts, as information intermediaries, provide oversight over management and thus help alleviate agency conflicts. The positive effect of analyst coverage, however, is severely reduced when the firm has a staggered board in place.     

Sources of earnings variability and their effect on earnings forecasts

Previous research shows that analysts’ forecasts of earnings do not fully incorporate information contained in reported earnings variability. This study investigates whether the inefficient forecast is because of a failure to incorporate observable information on two components of earnings variability: variability in operating performance and income smoothing. Our results show that analysts’ forecasts fully incorporate information contained in earnings variability for firms with high income smoothing and for firms with low operating variability. A smaller serial correlation of forecast errors is observed for firms with low operating variability, which suggests that analysts recognize the permanence in earnings for such firms.     

Stock index adjustments and analysts’ forecast optimism: A quasi-natural experiment on the CSI 300 Index

As stock index adjustments comprise a basic system of capital market, their potential influence on analysts’ earnings forecasts is worthy of research. Based on a research sample of 23 adjustments to the CSI 300 Index from June 2007 to June 2018 and the backup stocks announced during the same period, this study examines the impact of additions to stock index on analysts’ forecast optimism using a staggered difference-in-differences model. The research results show that after stocks are added to the stock index, analysts’ earnings forecast optimism about these stocks increases significantly. Cross-sectional analysis indicates that this increase is more significant when the market is bullish, institutional ownership is low, the ratio of listed brokerage firms is low, star analyst coverage is low, firms show seasoned equity offering activity, the ratio of analysts from the top five brokerage firms ranked by commission income is high, and the analysts’ brokerage firms are shareholders. However, analyst-level tests find that analysts’ ability helps to reduce the impact of additions to stock index on earnings forecast optimism. Furthermore, additions to stock index significantly increase analyst coverage and forecast divergence. Economic consequences tests find additions to stock index significantly increases stock price synchronization, which is partly mediated by analysts’ earnings forecast optimism. This study enriches the literature on the impact of basic capital market systems and analyst behavior. The findings suggest that investors should rationally evaluate analysts’ earnings forecasts for stocks added to the stock index and obtain further information from various channels to improve asset allocation efficiency.     

The effect of consistency in book-tax differences on analysts’ earnings forecasts: Evidence from forecast accuracy and informativeness

This study examines the relationship between the consistency of book-tax differences and the quality of analysts’ earnings forecasts. We find that the consistency of book-tax differences is associated with more accurate and informative forecasts. This suggests that the information embedded in the consistency of book-tax differences plays an important role in elevating the quality of analysts’ forecasts. Furthermore, the effect of consistency in book-tax differences on analyst forecast quality is greater for firms with noisier information environment. Finally, we find that the relation between consistency in book-tax differences and improvements in forecast accuracy and informativeness is stronger after the implementation of Regulation Fair Disclosure, which increased the role of public information in analysts’ forecasts.     

The bright side of analyst coverage on corporate innovation: Evidence from China

Using a sample of A-share listed companies in China from 2007 to 2019, we investigate the effect of analyst coverage on corporate innovation. We find that analyst coverage will promote corporate innovation, supporting the information hypothesis. We also discuss possible mechanisms of how analyst coverage increases innovation. The information and monitor effects are two plausible channels that allow analyst coverage to promote innovation. Heterogeneity analysis shows the positive relation is more pronounced in non-SOEs, in higher intellectual property protection regions. And considering the firms' life cycle, we find firms in the growth and maturity stage are more vulnerably affected by analysts. Further investigation reveals a positive relationship between analyst coverage and external innovation, and the increased innovation ultimately translates into the long-term value of firms. Our research enriches the impact of analyst coverage on innovation and provides new empirical evidence to improve the multi-level capital market.     

Analyst reputation and management earnings forecasts

Prior studies show that analysts with high reputation are influential in the market. This paper examines whether managers consider analyst reputation in shaping their voluntary disclosure strategy. Using Institutional Investor magazine’s All-American (AA) rankings as a proxy for analyst reputation, we find that the coverage of AA analysts is positively associated with the likelihood of quarterly management earnings forecasts (MEFs). We also find that AA analysts’ forecast optimism is more positively associated with the likelihood of MEFs than non-AA analysts’ forecast optimism when the firm is covered by AA analysts. Analyses based on AA analyst coverage changes and AA status changes confirm the relation between analyst reputation and MEFs. We further find that analyst reputation influences other MEF properties, such as forecast news, bias, and revisions, and that our results are robust to alternative measures of analyst reputation. Further analyses show that market reactions at quarterly earnings announcements are more positive (negative) when firms meet/beat (miss) AA analysts’ forecasts than when firms meet/beat (miss) non-AA analysts’ forecasts. Collectively, our findings suggest that managers strategically provide voluntary forecasts by taking into account the reputation of individual analysts following their firms.     

Do Corporate Governance Analysts Matter? Evidence from the Expansion of Governance Analyst Coverage

T his paper examines the economic consequences of the initiation of governance analyst coverage. Governance analysts process, enhance, and disseminate governance‐related information to capital market participants via, for example, governance reports and ratings. Using an exogenous shock in the United Kingdom, I find that an increase in governance analyst coverage results in increased governance quality, improved liquidity, increased financial analyst following, and improved investor breadth. These findings are consistent with governance analysts creating value for firms via monitoring, information dissemination/production, and investor recognition.     

Do analysts affect bad news timeliness?

I investigate the effect of analysts on the speed with which bad news is reflected in earnings. Intuitively, the more analysts that cover a firm, the more costly it will be for the firm to keep bad news suppressed. Thus, analyst coverage should positively affect bad news timeliness (BNT) (but not necessarily the differential timeliness of bad news over good news, or conditional conservatism). Using brokerage house mergers as a natural experiment with a difference-in-differences design, I find that an exogenous decrease in analyst coverage decreases BNT; that is, analysts positively affect BNT. The decrease in BNT is robust to controlling for unobserved firm heterogeneity, using a propensity score matched sample, persists for up to three years after the brokerage house merger, and is stronger for firms with relatively low analyst coverage before the merger. The result improves our understanding of how analysts affect a firm's information environment.     

Analysts' Selective Coverage and Subsequent Performance of Newly Public Firms

This study examines the ability of analysts to forecast future firm performance, based on the selective coverage of newly public firms. We hypothesize that the decision to provide coverage contains information about an analyst's underlying expectation of a firm's future prospects. We extract this expectation by obtaining residual analyst coverage from a model of initial analyst following. We document that in the three subsequent years, initial public offerings with high residual coverage have significantly better returns and operating performance than those with low residual coverage. This evidence indicates analysts have superior predictive abilities and selectively provide coverage for firms about which their true expectations are favorable.     

Industry specialist auditors, outsider directors, and financial analysts

This study investigates the relationships among industry specialist auditors, outside directors, and financial analysts. Specifically, we examine the effect of analyst coverage on the association between auditor industry specialization and outside directorship. We find that outside directors are less likely to hire industry specialist auditors for firms with high analyst coverage than for firms with low analyst coverage. Our findings suggest that analyst coverage moderates outside directors’ demand for industry specialist auditors, that is, financial analysts may compete with industry specialist auditors to some extent in monitoring financial reporting process.     

Are analysts' cash flow forecasts useful?

This study provides evidence that the cost of equity capital decreases with the number of analysts who issue both cash flow and earnings forecasts (cash analysts). The evidence also shows that cash analysts reduce information asymmetry and predict long‐term earnings more accurately than analysts who issue only earnings forecasts. Taken together, these findings suggest that cash analysts provide market participants with high‐quality information and, as a result, firms benefit from cash analyst coverage in the form of a reduced cost of equity capital.     

The Effect of the Private Securities Litigation Reform Act on Analyst Forecast Properties: The Impact of Firm Size and Growth Opportunities

Abstract:  We provide evidence that the effect of the Private Securities Litigation Reform Act (the Act) of 1995 on analyst forecast properties is conditional on firm size and growth opportunities. We show that analyst coverage, frequency of forecast revisions, forecast errors and dispersion after the Act decreased for large firms and for firms with low growth opportunities but increased for small firms and for firms with high growth opportunities. These results are consistent with the hypothesis that the Act results in additional high quality disclosures in large firms, which face higher litigation risk and tighter scrutiny from investors but not in smaller firms. Our findings of increases in analyst coverage and revision but deterioration in accuracy and precision of analyst forecasts for firms with high growth opportunities after the Act suggest that in spite of increased corporate disclosures, the information environment for analysts deteriorated in those firms.     

Firms’ innovation strategy under the shadow of analyst coverage

We study the effect of analyst coverage on firms’ innovation strategy and outcome. Using data of US firms from 1990 to 2012, we find evidence that an increase in financial analysts leads firms to cut research and development expenses, acquire more innovative firms, and invest in corporate venture capital. We attribute the first result to the effect of analyst pressure and the others to the informational role of analysts. We also find that financial analysts encourage firms to make more efficient investments related to innovation, which increases their future patents and citations and influences the novelty of their innovations.