High-Technology Intangibles and Analysts' Forecasts

This study examines the association between firms' intangible assets and properties of the information contained in analysts' earnings forecasts. We hypothesize that analysts will supplement firms' financial information by placing greater relative emphasis on their own private (or idiosyncratic) information when deriving their earnings forecasts for firms with significant intangible assets. Our evidence is consistent with this hypothesis. We find that the consensus in analysts' forecasts, measured as the correlation in analysts' forecast errors, is negatively associated with a firm's level of intangible assets. This result is robust to controlling for analyst uncertainty about a firm's future earnings, which we also find to be higher for firms with high levels of internally generated (and expensed) intangibles. Given that analyst uncertainty increases and analyst consensus decreases with the level of a firm's intangible assets, we also expect and find that the degree to which the mean forecast aggregates private information and is more accurate than an individual analyst's forecast increases with a firm's intangible assets. Finally, additional analysis reveals that lower levels of analyst consensus are associated with high-technology manufacturing companies, and that this association is explained by the relatively high R&D expenditures made by these firms. Overall, our results are consistent with financial analysts augmenting the financial reporting systems of firms with higher levels of intangible assets (in terms of contributing to more accurate earnings expectations), particularly R&D-driven high-tech manufacturers.     

Do analysts follow emerging economy firms with higher intangible assets? Empirical evidence from Egypt

This paper tests whether analyst coverage and effort are related to the level of intangible assets reported by Egyptian listed firms. Intangible assets represent increasingly important investments for many firms, but most of these assets are not capitalized under prevailing accounting standards. Analysts reduce the information asymmetry by examining both financial reports and other information. Many Egyptian firms today seek access to foreign capital. I hypothesize that the larger the potential intangible assets of firms the more analysts will cover these firms and pursue private information about these firms. Sample consists of 435 firm-year observations over the period 1999–2007, and intangible assets are measured using eight different firm- and industry-level proxies. Consistent with prior research, results suggest that coverage is significantly associated with firm R&D, industry advertising expenses, firm size, and trading volume. Results also suggest that analyst effort is a function of firm and industry-level R&D expenses and firm size.     

Concentrated Control,Analyst Following,and Valuation: Do Analysts Matter Most When Investors Are Protected Least?

This paper uses a sample of more than 2,500 firms from 27 countries to investigate the relation among ownership structure, analyst following, investor protection, and valuation. We find that analysts are less likely to follow firms with potential incentives to withhold or manipulate information, such as when the family/management group is the largest control rights blockholder. Furthermore, this relation is stronger for firms from low-shareholder-protection countries. Using valuation regressions that take into account potential endogeneity between analyst following and firm value, we find a positive valuation effect when analysts cover firms that have both potentially poor internal governance and weak country-level external governance. Overall, our findings suggest that corporate governance plays an important role in analysts' willingness to follow firms and that increased analyst following is associated with higher valuations, particularly for firms likely to face governance problems.     

Intangible Assets, Information Complexity, and Analysts' Earnings Forecasts

Abstract:   We examine the relation between analysts' earnings forecasts and firms' intangible assets, including technology‐based intangibles, brand names, and recognized intangibles. We predict that high information complexity of intangible assets increases the difficulty for analysts to assimilate information and increases analysts' forecast error of intangibles‐intensive firms. We find a positive association between analysts' forecast error and the firm's intangible intensity that deviates from the industry norm. We also find that analysts' forecast errors are greater for firms with diverse and innovative technologies. In contrast, analysts' forecast errors are smaller for biotech/pharmaceutical and medical equipment firms that are subject to intangibles‐related regulation.     

Capitalized intangibles and financial analysts

We examine whether firms that capitalize a higher proportion of their underlying intangible assets have higher analyst following, lower dispersion of analysts’ earnings forecasts and more accurate earnings forecasts relative to firms that capitalize a lower proportion. Under Australian generally accepted accounting principles, capitalization of intangible assets has become increasingly ‘routine’ since the late 1980s. It is predicted that this experience leads Australian analysts to expect firms with relatively more certain intangible investments to signal this fact by capitalizing intangible assets. Our results are consistent with this. We find that capitalization of intangible assets is associated with higher analyst following and lower absolute earnings forecast error for firms with a stock of underlying intangible assets. Our tests suggest a weaker association between capitalization and lower earnings forecast dispersion. We conclude that there are benefits for analysts, for management to have the option to capitalize intangible assets. These findings suggest that IAS 38 Intangible Assets and AASB 138 Intangible Assets reduce the usefulness of financial statements.     

Do Analysts Influence Corporate Financing and Investment?

We examine whether abnormal analyst coverage influences the external financing and investment decisions of the firm. Controlling for self-selection bias in analysts' excessive coverage, we find that firms with high (low) analyst coverage consistently engage in higher (lower) external financing than do their industry peers of similar size. Our evidence also demonstrates that firms with excessive analyst coverage overinvest and realize lower future returns than do firms with low analyst coverage. Our findings are consistent with the hypothesis that analysts favor the coverage of firms that have the potential to engage in profitable investment-banking business.     

Environmental performance and analyst information processing costs

This study tests whether the information processing costs of analysts vary positively with the environmental performance information available on the firms they follow. Consistent with this conjecture, we find that these costs increase when analysts process a wider array of environmental performance ratings. Specifically we find that as the number of environmental performance ratings increases, analysts cover fewer firms in their portfolio, provide fewer earnings-per-share (EPS) forecast revisions, and make less timely forecast revisions. Two additional tests confirm that our results relate to environmental performance information and not to confounding factors. First, the “shock” of the Global Warming Solutions Act of 2006 implemented for California firms in 2012 increases analyst information processing costs incremental to the main effect of environmental performance ratings. Second, analyst information processing costs increase further in the year a firm covered by an analyst provides a CSR report for the first time. Our results have implications for firm managers considering voluntary environmental disclosure and investors deciding on what stocks to include in their socially responsible portfolios because when processing costs are high, analysts will provide less information or less timely information, resulting in more gradual price discovery in capital markets.     

Intangible Assets and Firms' Disclosures: An Empirical Investigation

This study examines how research and development (R&38;D) and advertising expenditures affect firms' disclosures. Generally accepted accounting principles (GAAP) mandate that these expenditures be immediately expensed in financial reports, despite the fact that they often benefit the firm for longer periods. Prior studies find, however, that investors consider intangible assets in their valuation of firms. These studies argue that current GAAP, by not recognizing the value generated by these assets, severely impairs the usefulness of accounting reports. I investigate if firms with higher levels of R&38;D and advertising expenditures place greater reliance on voluntary, and therefore more flexible, disclosures such as voluntary publications and investor relations. Using analysts' ratings of firms' disclosures, I find that firms with higher levels of intangible assets are more likely to receive significantly higher ratings for their investor relations programs or voluntary publications than for their annual reports. These findings suggest that firms with higher levels of intangible assets emphasize supplemental disclosures because mandated accounting disclosures inadequately present their financial performance. These results have important policy implications for regulators and investors since they indicate that voluntary disclosures, which are unregulated and unaudited, are an important means of disclosure for these firms.     

Analyst coverage,executive compensation and corporate risk-taking: Evidence from property–casualty insurance firms

Using an exogenous drop in analyst coverage introduced by broker closures and mergers, we test for the causal impact of analyst coverage on corporate risk-taking, in an opaque industry. We document an increase in risk using several book-based and market-based risk measures, including tail and default risk measures. Results are driven by firms with stronger managerial risk-taking compensation incentives. The increase in risk is stronger in more opaque firms, and firms with weaker policyholder monitoring. Firm risk increases through at least one risk-taking action, such as investing firm assets in higher-risk bonds. Our study highlights the importance of stock analysts in affecting corporate risk-taking, especially in the presence of stronger managerial, compensation risk-taking incentives.     

Financial analysts' career concerns and the cost of private debt

Career-concerned analysts are averse to firm risk. Not only does higher firm risk require more effort to analyze the firm, thus constraining analysts' ability to earn more remuneration through covering more firms, but it also jeopardizes their research quality and career advancement. As such, career concerns incentivize analysts to pressure firms to undertake risk-management activities, thus leading to a lower cost of debt. Consistent with our hypothesis, we find a negative association between analyst career concerns and bank loan spreads. In addition, our mediation analysis suggests that this association is achieved through the channel of reducing firm risk. Additional tests suggest that the effect of analyst career concerns on loan spreads is more pronounced for firms with higher analyst coverage. Our study is the first to identify the demand for risk management as a key channel through which analysts help reduce the cost of debt.     

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.     

Market reactions to the closest peer firm’s analyst revisions

Prior analyst literature focuses on the impact of financial analysts on the firms they cover, and prior information-transfer literature concentrates on the externalities of information provided by management. This paper fills gaps in both streams of literature by examining the focal firm’s market reactions to the closest peer firm’s (identified by product similarity) analyst revisions. We find that the focal firm’s stock price reacts to the closest peer’s analyst revisions made by analysts who are not covering the focal firm. The focal firm’s cumulative abnormal return for a five-day window centered on the revision date is 0.54% higher if the peer firm’s analyst revision magnitude is in the top decile than if it is in the bottom decile. Cross-sectional tests show that the sensitivity of the focal firm’s market reactions to the peer firm’s revisions increases with the revision informativeness and the similarity between the focal firm and the peer firm. In addition, we find that focal firms do not react to peer firms’ revisions in industries with strong competition where the competitive effects cancel out the spillover effects. Finally, we find that the focal firm’s market reactions can predict its own future analyst revisions, suggesting that the reactions are at least partially rational.     

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.     

Causal language intensity in performance commentary and financial analyst behaviour

We use automated techniques to measure causal reasoning on earnings‐related financial outcomes of a large sample of MD&A sections of US firms and examine the intensity of causal language in that context against extent of analyst following and against properties of analysts’ earnings forecasts. We find a positive and significant association between a firm's causal reasoning intensity and analyst following and analyst earnings forecast accuracy respectively. Correspondingly, analysts’ earnings forecast dispersion is negatively and significantly associated with causal reasoning intensity. These results suggest that causal reasoning intensity provides incremental information about the relationship between financial performance outcomes and its causes, thereby reducing financial analysts’ information processing and interpreting costs and lowering overall analyst information uncertainty. Additionally, we find that decreases in analyst following are followed by more causal reasoning on performance disclosure. We also find that firms with a considerable increase of causal disclosure especially attract new analysts who already cover many firms. Overall, our evidence of the relationship between causal reasoning intensity and properties of analyst behaviour is consistent with the proposition that causal reasoning is a generic narrative disclosure quality characteristic, able to provide incremental information to analysts and guide analysts' behaviour.     

Intangible Assets and Corporate Signaling

Research and development (R&D) and advertising expenditures often result in patents, technologies and brand names which are difficult to accurately value. Under current generally accepted accounting principles (GAAP) these intangible assets are generally not recognized in the financial statements, but instead are expensed in the period that they occur. Prior studies note that the market-to-book ratios of firms with significant levels of R&D and advertising expenditures suggest that investors, at least partially, value these assets. Researchers and practitioners argue that current GAAP, by not recognizing these intangible assets, reduces the usefulness and relevance of accounting reports.We investigate whether companies with significant levels of intangible assets are more likely to emphasize dividend increases and stock repurchases (which are generally perceived as signaling favorable investment opportunities), instead of traditional accounting disclosures, as a means of overcoming adverse selection. Because these assets are difficult to measure, cash distributions may be viewed as a more credible means of signaling firm value to investors. Using analysts' ratings of firms' accounting disclosures, we find that companies with higher levels of R&D and advertising expenditures are less likely to provide extensive accounting disclosures and instead tend to employ dividend and stock repurchase signals. We obtain these results even after controlling for other firm attributes, such as size, stock returns performance, leverage, liquidity and investors' expectations of growth opportunities. We also find that the market reaction to dividend increase and stock repurchase announcements is greater for firms with higher levels of R&D and advertising expenditures, indicating that these announcements are more informative for such firms.     

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.     

The Two Faces of Analyst Coverage

We find that positive excess (strong) analyst coverage is associated with overvaluation and low future returns. This finding is consistent with the view that excessive analyst coverage, driven by investment banking incentives and analyst self-interests, raises investor optimism causing share prices to trade above fundamental value. However, weak analyst coverage causes stocks to trade below fundamental values. This finding indicates that investors tend to believe that these firms are more likely to be plagued by information asymmetries and agency problems. The results remain robust after controlling for the possible endogenous nature of analyst coverage and analysts' self-selection bias.     

Does foreign investor demand for information affect forecast accuracy? Evidence from the Chinese stock markets

Prior international accounting studies have examined mainly the supply side of analyst research. Specific trading rights and financial reporting systems in China provide a unique opportunity to test both demand and supply factors of analyst information. For shares traded only by less-informed foreign investors, the increased information demand may create incentives for analysts to exert greater efforts than for shares traded by local investors. This study provides evidence that analyst effort (proxied by analyst coverage) and expertise (proxied by consensus cross-analyst forecast variability) affect forecast accuracy more significantly for shares traded by foreign investors than for shares traded by local investors. Additionally, I find that the relation between analyst characteristics and relative forecast accuracy is stronger for shares traded by the foreign investors. The findings are consistent with analysts responding to demands for information by less-informed investors.     

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.     

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.