Do voluntary disclosures of product and business expansion plans impact analyst coverage and forecasts?

We investigate whether voluntary disclosures of product and business expansion plans affect analyst coverage and forecasts. We find that the level of analyst coverage is positively associated with the incidence of disclosures of product and business expansion plans. We also find that product and business expansion disclosures increase the informativeness of analyst earnings forecasts. We find no evidence that product and business expansion disclosures increase analyst forecast errors. Overall, our study contributes to understanding the role of product and business expansion disclosures in analyst forecast behaviour.     

The Effects of Disclosure and Analyst Regulations on the Relevance of Analyst Characteristics for Explaining Analyst Forecast Accuracy

We posit and find an effect of disclosure and analyst reporting regulations implemented from 2000 through 2003 (including Regulation Fair Disclosure, the Sarbanes‐Oxley Act and the Global Settlement Act) on the importance of analyst and forecast characteristics for analyst forecast accuracy. Following the enactment of these regulations, more experienced analysts and All‐Star analysts do not maintain their superior forecast accuracy, and analysts employed by large brokerage houses perform worse than other analysts. In addition, we find a decrease in the importance of analyst effort, the number of industries and firms followed, days elapsed since the last forecast, and forecast horizon. While the importance of bold upward forecast revisions does not change, bold downward revisions lose their relevance for forecast accuracy after 2003. Finally, we find an increase in the importance of prior forecast accuracy. We find that the importance of these characteristics varies with the precision of publicly available information. Specifically, the decrease in the importance of most analyst and forecast characteristics and the increase in the importance of prior forecast accuracy are greater when the precision of publicly available information is low. Overall, our results suggest that the positive effects of experience, effort, brokerage house size and All‐Star status on forecast accuracy in the pre‐regulation period were because of the information advantages that these analysts enjoyed (rather than their ability to generate private information). In contrast, our results suggest that prior forecast accuracy is related to analysts’ ability to generate private information.     

The coverage assignments of financial analysts

Previous studies document that forecast accuracy impacts analyst career outcomes. This paper investigates the influence of forecast accuracy on coverage assignments. I show that brokerage houses reward accurate analysts by assigning them to high-profile firms and penalise analysts exhibiting poor accuracy by assigning them to smaller firms. The coverage of high-profile firms increases the potential for future compensation linked to investment banking and trading commissions. In addition, covering such firms increases analysts' recognition from buy-side investors, which, in turn, increases the likelihood of obtaining broker votes and votes for the Institutional Investor star ranking. Overall, my results indicate that high forecast accuracy leads to increased future compensation.     

The effect of restatements on analyst behavior

This paper examines how changes in the credibility of financial reporting affect analyst behavior. Using a sample of restatement firms experiencing a substantial change in credibility over 1997–2006, we document that restatements have a long‐lived effect on analyst behavior and that analysts differentiate between restatements caused by irregularities and those caused by errors. We find that while irregularity restatement firms exhibit a reduction in analyst coverage and forecast accuracy and an increase in forecast dispersion in the post‐restatement period, other restatement firms exhibit only an increase in forecast error. Finally, we find evidence to suggest that remedial actions reduce the effect of irregularity restatements on analyst behavior. Overall, these results are consistent with the notion that restatements affect analyst behavior in forming judgements regarding subsequent earnings announcements.     

The Extreme Future Stock Returns Following I/B/E/S Earnings Surprises

We investigate the stock returns subsequent to quarterly earnings surprises, where the benchmark for an earnings surprise is the consensus analyst forecast. By defining the surprise relative to an analyst forecast rather than a time‐series model of expected earnings, we document returns subsequent to earnings announcements that are much larger, persist for much longer, and are more heavily concentrated in the long portion of the hedge portfolio than shown in previous studies. We show that our results hold after controlling for risk and previously documented anomalies, and are positive for every quarter between 1988 and 2000. Finally, we explore the financial results and information environment of firms with extreme earnings surprises and find that they tend to be “neglected” stocks with relatively high book‐to‐market ratios, low analyst coverage, and high analyst forecast dispersion. In the three subsequent years, firms with extreme positive earnings surprises tend to have persistent earnings surprises in the same direction, strong growth in cash flows and earnings, and large increases in analyst coverage, relative to firms with extreme negative earnings surprises. We also show that the returns to the earnings surprise strategy are highest in the quartile of firms where transaction costs are highest and institutional investor interest is lowest, consistent with the idea that market inefficiencies are more prevalent when frictions make it difficult for large, sophisticated investors to exploit the inefficiencies.     

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.     

The effect of repeat restructuring charges on analysts’ forecast revisions and accuracy

The primary objective of this study is to examine the effect of prior restructuring charges on analyst forecast revisions and accuracy. We find evidence that analysts respond differently to first-time restructuring firms than to repeat restructuring firms. Analysts revise their forecasts of both one-year-ahead earnings and five-year long-term growth in earnings more negatively for first-time restructuring firms than for firms with prior charges. When we examine forecast errors in the year subsequent to the restructuring, we find that current charges complicate analysts’ earnings forecast task. We further find that the decline in analyst forecast accuracy is mitigated by prior charges within past two years.     

Disclosure of internal control material weaknesses and optimism in analyst earnings forecasts

This paper investigates how analyst forecast optimism is associated with disclosures of internal control material weaknesses (ICMWs) and their remediation under Section 404 of the Sarbanes–Oxley Act (SOX). Drawing on agency theory, I hypothesize that analysts are likely to issue earnings forecasts that are more optimistic for firms with ICMW disclosures than for those without ICMW disclosures. Using a sample of 20,875 firm-year observations with 10-K (10-Q) reports from 2004 to 2018, I find a positive association between ICMW disclosures and analyst forecast optimism. This positive association is partially driven by investors’ inability to unravel analyst forecast bias and analysts’ intentions to curry favor with management for private information. In addition, analysts are found to issue less optimistic forecasts for firms with ICMW remediation disclosures compared with those without ICMW remediation disclosures. A series of propensity score matching and regression analyses are conducted to test the robustness of my inferences. Overall, the paper suggests that analysts have incentives to take the opportunity of firms disclosing ICMWs to bias their forecasts upward for self-interest. The findings have the potential to assist regulators in guiding analyst behavior and educating investors to unravel positive bias in analyst forecasts.     

ADRs,Analysts, and Accuracy: Does Cross Listing in the United States Improve a Firm's Information Environment and Increase Market Value?

This paper investigates the relation between cross listing in the United States and the information environment of non‐U.S. firms. We find that firms that cross list on U.S. exchanges have greater analyst coverage and increased forecast accuracy than firms that are not cross listed. A time‐series analysis shows that a change in analyst coverage and forecast accuracy occurs around cross listing. We also document that firms that have more analyst coverage and higher forecast accuracy have higher valuations. Furthermore, the change in firm value around cross listing is correlated with changes in analyst following and forecast accuracy, suggesting that cross listing enhances firm value through its effect on the firm's information environment. Our findings support the hypothesis that cross‐listed firms have better information environments, which are associated with higher market valuations.     

The innovation consequences of mandatory patent disclosures

We investigate the effect of patent disclosures on corporate innovation. Using the American Inventor's Protection Act (AIPA) as a shock that increased patent disclosures, we find an increase in innovation for firms whose rivals reveal more information after the AIPA and a decrease in innovation for firms whose own disclosures are divulged to competitors as a result of the law. These findings suggest patent disclosures generate both spillover benefits and proprietary costs. Our findings provide justification for patent disclosure requirements by demonstrating positive externalities: rivals' disclosures facilitate a firm's innovation. However, we also highlight that mandatory patent disclosures can impose proprietary costs on firms. These results broadly contribute to our understanding of the real effects of disclosure, such that forcing firms to share proprietary information can be privately costly but beneficial to other firms.     

Does information uncertainty affect investors’ responses to analysts’ forecast revisions? An investigation of accounting restatements

Prior studies provide only limited evidence on how and why investors rely on analyst forecasts. We investigate one aspect of this research paradigm by examining investor response to analyst forecast revisions using accounting restatements as a proxy for uncertainty. We find that investors tend to rely more on the information that analyst characteristics convey about forecast accuracy in restatement firms than in non-restatement firms. The evidence also suggests that the level of restatement intensity and the length of reaction window affect investors’ reliance on these characteristics. Further analysis demonstrates that the innovation in forecast revisions also affects the association between investor response and analyst characteristics. Our findings are consistent with increased information uncertainty stimulating investor demand for analyst research.     

Information Risk and Fair Values: An Examination of Equity Betas

Using a sample of U.S. financial institutions, we exploit recent mandatory disclosures of financial instruments designated as fair value level 1, 2, and 3 to test whether greater information risk in financial instrument fair values leads to higher cost of capital. We derive an empirical model allowing asset‐specific estimates of implied betas, and find evidence that firms with greater exposure to level 3 financial assets exhibit higher betas relative to those designated as level 1 or level 2. We further find that this difference in implied betas across fair value designations is more pronounced for firms with ex ante lower‐quality information environments: firms with lower analyst following, lower market capitalization, higher analyst forecast errors, or higher analyst forecast dispersion. Overall, the results are consistent with a higher cost of capital for more opaque financial assets, but also suggest that differences in firms' information environments can mitigate information risk across the fair value designations.     

The usefulness of firm risk disclosures under different firm riskiness,investor-interest,and market conditions: New evidence from Finland

To date, there is only meager research evidence on the usefulness of mandatory annual report risk disclosures to investors. Although it has been argued that corporate disclosure decreases information asymmetry between management and shareholders, we do not know whether investors benefit from high-quality risk reporting in a highly regulated risk disclosure environment. In this paper, we performed association tests to examine whether the quality of firms' mandatory risk disclosures relate to information asymmetry in the Finnish stock markets. In addition, we analyzed whether the usefulness of risk disclosures depends on contingency factors such as firm riskiness, investor interest, and market condition. We demonstrate that the quality of risk disclosure has a direct negative influence on information asymmetry. We also document that risk disclosures are more useful if they are provided by small firms, high tech firms, and firms with low analyst coverage. We also found that momentum in stock markets affects the relevance of firms' risk reports.     

Value relevance of human capital based disclosures: Moderating effects of labor productivity,investor sentiment,analyst coverage and audit quality

Voluntarily disclosed employee costs in annual reports of listed firms are value relevant, according to US based studies. However, investors appear to fail to take full advantage of the signaling opportunities presented by these disclosures. This study suggests that labor productivity, audit quality, analyst coverage and high technology categorization moderate the value relevance of voluntarily disclosed employee costs in Malaysia, contributing a novel set of moderating variables to the human capital accounting and value relevance literature, and extending the extant literature to an emerging economy. The results are consistent with the findings from US based settings, after incorporating these moderating factors. Pertinent policy recommendations, based on these findings, are suggested.     

Social comparison of cost behaviour and financial analysts

We investigate whether social comparison of a firm’s reported selling, general and administrative (SG&A) expenses affects financial analysts’ information uncertainty (and their behaviour). Based on a sample of US firms, we examine whether similarity of a firm’s SG&A to an industry-specific peer-based benchmark (or social benchmark) is associated with analyst forecast dispersion, forecast error and coverage. For external observers, the SG&A relative to sales (SG&A ratio) is a key diagnostic of a firm’s cost behaviour, but interpretational ambiguity of the SG&A signal is likely to incentivise search for information-relevant external cues to set expectations about and assess a firm’s SG&A ratio. Higher similarity to the social benchmark is expected to attenuate information asymmetry between analysts and firms regarding firms’ ability to effectively control overheads, decreasing analyst information uncertainty about cost behaviour and performance. In line with a varying weights model for social comparison, we observe a negative association between SG&A similarity and both forecast dispersion and error of one-year-ahead earnings for firms with a prior SG&A ratio exceeding the social benchmark. Our findings also show a negative relationship between SG&A similarity and analyst coverage, especially for firms with a prior SG&A ratio exceeding the social benchmark.     

CDS trading and analyst optimism

This paper investigates whether and how the initiation of Credit Default Swaps (CDS) trading affects analyst forecast optimism. First, we document that the initiation of CDS trading curbs analyst forecasts optimism. Second, we find that the dampening effect of CDS on analyst optimism is stronger for firms with negative news and for firms with poorer financial performance or higher leverage, supporting a “correction effect” of CDS on non-strategic optimism. Moreover, we find that CDS also has a “disciplining effect” on strategic optimism that arises from incentives to cultivate relation with management or to please institutional investors. Overall, our evidence shows that the CDS market not only provides important information for analysts, but also alters analysts’ reporting incentives and enhances their objectivity. Additional analysis shows that this effect has disappeared after the Dodd-Frank Act.     

The brain gain of CFOs in China: The case of analyst forecasts

We study the impact of CFOs with foreign experience on analysts' forecast accuracy in emerging markets. Using a unique data set from China, we find that analysts' forecast accuracy increases when firms hire CFOs with foreign experience, confirming the brain gain effect of CFOs. Our results are robust after addressing potential endogeneity by introducing the propensity score matched (PSM) procedure and Heckman two-stage method. Channel analyses show that CFOs with foreign experience are related to decreased earnings management and a greater probability of hiring high-quality auditors, indicating that the improvement in financial reporting quality and information environment brought by returnee CFOs mainly drive our results. Further cross-section tests reveal that compared to firms with more external pressure, the positive effect of returnee CFOs on analysts' forecast accuracy is more pronounced among firms with fewer analyst coverage and belonging to less competitive industries. Returnee CFOs with foreign work experience exert a more significant impact on analysts' forecast accuracy than those with foreign study experience. Overall, we provide the first evidence on the brain gain of CFOs in terms of analyst forecasts.     

Low-carbon city initiatives and analyst behaviour: A quasi-natural experiment

This paper investigates how environmental regulation and action affect analyst behaviour. Exploiting staggered enactment of low carbon city (LCC) initiatives in a difference-in-differences (DiD) setting, we observe that analyst forecast accuracy (dispersion) is significantly lower (greater) for client firms headquartered in cities covered by the LCC pilot programme, especially among firms with a low-quality information environment. The LCC effort affects analyst behaviour via increased firm risk and reduced earnings predictability, causing enhanced site visits and coverage. The results are stronger in cities with more rigorous enforcement and regulation intensity, for private firms with high business complexity and in heavily polluting industries. Results are robust to DiD models with entropy balancing matching, placebo tests, parallel trend tests, and a battery of fixed effects. Collectively, they reveal that environmental regulation has real impacts on analyst forecast behaviour.     

Analyst forecast characteristics and the cost of debt

We examine the relation between analyst forecast characteristics and the cost of debt financing. Consistent with the view that the information contained in analysts’ forecasts is economically significant across asset classes, we find that analyst activity reduces bond yield spreads. We also find that the economic impact of analysts is most pronounced when uncertainty about firm value is highest (that is, when firms have high idiosyncratic risk). Our findings are robust to controls for private information in equity prices and level of corporate disclosures. Overall, the results indicate that the information contained in analyst forecasts is valued outside the equity market and provide an additional channel in which better information is associated with a lower cost of capital.     

IFRS adoption and analysts’ earnings forecasts: Australian evidence

We study 145 large listed Australian firms to explore the impact of international financial reporting standards (IFRS) adoption on the properties of analysts’ forecasts and the role of firm disclosure about IFRS impact. We find that analyst forecast accuracy improves, and there is no significant change in dispersion in the adoption year, suggesting that analysts coped effectively with transition to IFRS. However, we do not observe the expected relationship between firms’ IFRS impact disclosures in their financial statements issued at the end of the transition year with forecast error and dispersion in the adoption year. The results question the timeliness and usefulness of financial statement disclosure, even in a setting where disclosure was mandated by accounting standards (AASB 1047 and AASB 1) and firms had strong incentives to provide information to analysts.