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Article
Publication date: 5 October 2021

Omar Farooq

This paper documents the effect of different types of information on the value of financial analysts.

Abstract

Purpose

This paper documents the effect of different types of information on the value of financial analysts.

Design/methodology/approach

The authors use the pooled OLS regression and the data of nonfinancial firms from France to test our hypotheses. The data covers the period between 1997 and 2019.

Findings

The results show that analysts are more likely to cover those firms that incorporated greater proportion of market-wide information in their prices. Consistent with the economies of scale view, the authors argue that analysts specialize in the interpretation market-wide information. By doing so, they are able to cover relatively large number of firms simultaneously. The results also show that the value of analyst coverage (measured as the impact of analyst coverage on firm value, probability of stock price crash and probability of stock price jump) is a function of the extent to which different types of information are incorporated in prices. The authors’ results suggest that the impact of analyst coverage on firm value and on probability of crash is less pronounced in firms that incorporate greater proportion of market-wide information. In case of probability of jump, the results show that the impact of analyst coverage is more pronounced firms that incorporate greater proportion of market-wide information.

Originality/value

The major contribution of this paper is to document the impact of different types of information on the extent of analyst coverage. Furthermore, this paper also uses various measures (the impact of analyst coverage on firm value, probability of stock price crash and probability of stock price jump) to show how different types of information affects the value of analyst coverage.

Details

Journal of Economic and Administrative Sciences, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1026-4116

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Article
Publication date: 30 October 2018

Omaima Hassan and Gianluigi Giorgioni

This study aims to investigate the impact of country-level corruption and firms’ anti-bribery policies on analyst coverage. Analyst coverage has been identified as a…

Abstract

Purpose

This study aims to investigate the impact of country-level corruption and firms’ anti-bribery policies on analyst coverage. Analyst coverage has been identified as a powerful tool to detect fraud and should equally act as a possible tool to reduce corruption.

Design/methodology/approach

This study used a negative binomial count regression method on a longitudinal data set of a sample of S&P Global 1200 companies for the years 2010-2015. To control for potential endogeneity bias and improve the reliability of the estimation, both country-level corruption and firms’ anti-bribery policies variables were instrumented.

Findings

After controlling potential endogeneity bias, the results show that the adoption of anti-bribery policies at firm level attracts more analysts to follow a firm. The results for corruption at country level show that analyst coverage increases in less corrupted countries indicating that the costs of corruption exceed its potential benefits. When the variables corruption at country level and anti-bribery policies are interacted, the relationship is positive and highly significant.

Practical implications

Given the potential important role played by anti-corruption measures, firms are encouraged to adopt them to reduce the incidence of corruption and to increase analyst coverage, which will reinforce the benign effect of monitoring.

Originality/value

Although the literature on corruption at the country level is rich, it is geared towards the determinants of corruption in contrast to its consequences, and fewer studies have focused on the impact of corruption at firm level because of data limitations. This paper addresses this gap and contributes to the literature on the consequences of corruption at firm level.

Details

Managerial Auditing Journal, vol. 34 no. 3
Type: Research Article
ISSN: 0268-6902

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Article
Publication date: 14 March 2016

Shin-Rong Shiah-Hou

What is the role of analysts in reducing agency problems and information asymmetry between stockholders and managers? The purpose of this paper is to confirm the analyst’s…

Abstract

Purpose

What is the role of analysts in reducing agency problems and information asymmetry between stockholders and managers? The purpose of this paper is to confirm the analyst’s role by examining his or her influence on CEO compensation structure.

Design/methodology/approach

The major population for this study consists of publicly traded corporations of the S & P 1500 for which data on CEO compensation is available from Standard & Poor’s Execucomp database, along with the proxy statements of these firms. Regression analysis is used to test hypotheses about the effect of analyst coverage on CEO compensation.

Findings

The evidence shows that CEOs of firms with greater analyst coverage or higher analyst coverage quality (analyst coverage index) have higher pay-for-performance (Delta), more compensation incentives to increase firm risk (Vega), more total compensation, and more excess compensation. Even after controlling for the effect of other types of corporate governance, including internal governance and institutional holdings, analysts’ activities still have an incremental effect on CEO compensation structure.

Practical implications

The authors findings may be useful to investors who use analyst coverage to evaluate the firm’s CEO compensation, as it suggests that investors may reference the information about analyst coverage of firms to craft appropriate CEO compensation structures.

Originality/value

The authors results contribute by showing that the extra effect of analyst activities on CEO compensation structure exists, even after controlling for other types of governance mechanisms, such as internal governance and institutional investors’ holdings.

Details

Managerial Finance, vol. 42 no. 3
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 31 August 2021

Omar Farooq, Harit Satt and Fatimazahra Bendriouch

This paper aims to document the relationship between advertising expenditures and analyst coverage in a sample of Indian firms during the period between 2000 and 2019.

Abstract

Purpose

This paper aims to document the relationship between advertising expenditures and analyst coverage in a sample of Indian firms during the period between 2000 and 2019.

Design/methodology/approach

In order to test the effect of advertising expenditures on the extent of analyst coverage, the authors estimate various versions of pooled ordinary least squares (OLS) regression. The dependent variable (ANALYST) measures the total number of analysts covering a firm in a given year. The main independent variable of interest in this paper represents the advertising activity. The authors define the extent of advertising activity (ADVERT) as the ratio of total advertising expenditures and total assets.

Findings

The study’s results show that advertising expenditures have a significantly positive impact on the extent of analyst coverage and are robust across various proxies of the key variables and various estimation procedures.

Practical implications

There are a number of key takeaways from our study. First, firms that expend more resources on advertising are more likely to be followed by analysts which is associated with better performance, lower information asymmetries associated and high advertising expenditures. Second, stock prices with more information embedded in them may signify that these firms receive more attention from investors and have lower information asymmetries. And finally the impact of advertising on the decision of an analyst to cover a firm becomes more pronounced for firms with high stock price synchronicity. All these three main conclusions are giving investors a clear insight on analyst coverage, advertising expenditure and the link between the two.

Originality/value

The results are consistent with the argument that advertising expenditures induces analysts to cover firms because firms with high advertising activities are more likely to have better performance, lower information asymmetries and increased attention from investors. All of these factors are supposed to facilitate the analyst coverage.

Details

International Journal of Emerging Markets, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1746-8809

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Article
Publication date: 15 February 2013

Kam C. Chan, Feida Zhang and Weining Zhang

The purpose of this paper is to study the relationship between institutional holdings and analyst coverage in the context of the heterogeneous nature of institutional investors.

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1194

Abstract

Purpose

The purpose of this paper is to study the relationship between institutional holdings and analyst coverage in the context of the heterogeneous nature of institutional investors.

Design/methodology/approach

Similar to prior studies (e.g. Ke and Ramalingegowda; Ramalingegowda and Yu), this paper obtains institutional investors' trading classifications (transient, dedicated, and quasi‐indexing) from Brian Bushee directly. To examine the hypotheses, the paper uses a two‐step instrumental variable approach demonstrated in O'Brien and Bhushan to mitigate the simultaneity relationship between the change in analyst coverage and the change in the number of heterogeneous institutional investors.

Findings

The findings suggest that such relations are different among transient, dedicated, and quasi‐indexing institutional investors. Specifically, there are three major results. First, a change to the number of analyst coverage has the lowest impact on the change in the number of dedicated institutional investors. Second, a change in the number of transient institutional investors has a higher impact on change in analyst coverage than those for change in the number of dedicated and quasi‐indexing institutional investors. Third, changes to analysts' buy or sell recommendations have the least impact on the change in the number of dedicated institutions, relative to transient and quasi‐indexing institutions.

Research limitations/implications

The findings suggest that institutional investors are not homogeneous. Research studies on institutional investors need to disentangle the differences among different types of institutions.

Originality/value

The paper provides a comprehensive study on different institutional investors and analyst coverage. The findings show the complex nature of the interaction between institutional investors and analyst coverage.

Details

Review of Accounting and Finance, vol. 12 no. 1
Type: Research Article
ISSN: 1475-7702

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Article
Publication date: 31 January 2011

Jerry Sun and Guoping Liu

The purpose of this paper is to examine whether high analyst coverage increases or decreases accounting conservatism.

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3627

Abstract

Purpose

The purpose of this paper is to examine whether high analyst coverage increases or decreases accounting conservatism.

Design/methodology/approach

Sample firms were selected from the Compustat and I/B/E/S databases for years 1989‐2006. The authors used both accrual‐based and market‐value‐based measures of accounting conservatism, also the extent to which negative cash flow from operations is more timely recognized via accruals than positive cash flow from operations to measure accounting conservatism. The regression analyses are conducted to test the hypotheses.

Findings

Strong evidence was found that analyst coverage is positively associated with accounting conservatism. The results suggest that firms choose more conservative accounting methods when they are followed by more analysts than when they are followed by fewer analysts. The results are robust to a battery of sensitivity analyses.

Originality/value

This paper sheds light on how analyst coverage affects firms' accounting choices and extends the limited research on the monitoring role of analyst coverage. The findings are consistent with the notion that analyst coverage plays an important corporate governance role in the financial reporting process. This paper also adds to the literature on the economic determinants of accounting conservatism, and provides some implications for practitioners.

Details

Managerial Finance, vol. 37 no. 1
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 10 August 2010

Nont Dhiensiri and Akin Sayrak

The purpose of this study is to investigate the value of analyst coverage on the covered firms.

Downloads
1252

Abstract

Purpose

The purpose of this study is to investigate the value of analyst coverage on the covered firms.

Design/methodology/approach

To isolate the value impact of analyst coverage, the study focuses on a unique set of firms that receive analyst coverage for the first time after having been traded in an exchange for at least one year. Event study and ordinary least square regressions are used to test the hypotheses.

Findings

There is a significant and positive price reaction at the time of the announcement of analyst coverage initiations. However, unlike the coverage initiations around the initial public offers (IPOs), the price impact is not related to the reputation of the analyst firm, the exchange listing or whether the analyst firm is also the IPO underwriter. The sample firms do not experience significant reduction in the level of information asymmetry but experience a significant increase in liquidity. The increase in liquidity only occurs after the coverage initiations. The increase in liquidity is not explained by the increase in institutional investors' interest. Finally, the price impact around a coverage initiation is positively related to the change in liquidity.

Practical implications

The findings suggest that firms benefit from analyst coverage through an improvement in liquidity.

Originality/value

This is the first study to focus on the analysts' first‐time coverage initiations. It argues that focusing on the first‐time coverage initiations provides a better analysis of the effects of analyst activities on the firm value.

Details

Review of Accounting and Finance, vol. 9 no. 3
Type: Research Article
ISSN: 1475-7702

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Article
Publication date: 11 January 2019

Elena Precourt

The purpose of this paper is to examine the section of the Jumpstart Our Business Startups (JOBS) Act related to information dissemination by sell-side security analysts

Abstract

Purpose

The purpose of this paper is to examine the section of the Jumpstart Our Business Startups (JOBS) Act related to information dissemination by sell-side security analysts. The paper analyzes how the abolishment of the quiet period requirements for emerging growth companies (EGCs) changes the analyst initiation timing and market expectation of and reaction to the issuance of the analyst recommendations.

Design/methodology/approach

This paper considers the effect of the abolishment of the quiet period requirements on analyst coverage initiations for EGCs with IPOs between January 2006 and December 2015 using regression analyses and probability models.

Findings

The results confirm the current anecdotal and empirical evidence that a shorter, de facto, quiet period exists. Analyst issue stronger average ratings for EGCs than for similar firms with IPOs before the JOBS Act. EGCs with initiations from multiple analysts also experience stronger positive market reaction than the firms with initial offerings before the JOBS Act. The market seems to anticipate which EGCs will have initiations and particularly which EGCs will have initiations from multiple analysts. The investors, however, do not fully anticipate the strength of actual recommendations.

Practical implications

This paper is important for researchers, practitioners and policy-makers to understand how analysts impact the financial markets, how timing of analyst initiations affects stock prices of EGCs and what firm characteristics play a role in securing analyst coverage shortly after initial offerings.

Originality/value

This paper adds to the emerging literature on consequences of and changes brought by the JOBS Act. Specifically, this paper extends the limited literature on analyst initiations issued for firms with IPOs following the JOBS Act, timing of those initiations and magnitude of the market’s response to the initiations.

Details

Journal of Financial Regulation and Compliance, vol. 27 no. 1
Type: Research Article
ISSN: 1358-1988

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Article
Publication date: 18 September 2009

Faten Lakhal

The purpose of this paper is to examine whether financial analysts are sensitive to voluntary earning disclosures.

Downloads
1083

Abstract

Purpose

The purpose of this paper is to examine whether financial analysts are sensitive to voluntary earning disclosures.

Design/methodology/approach

The paper is based on a literature review of the relationship between analysts' behaviour and corporate disclosures. It is assumed first that analyst coverage both influences and is influenced by voluntary earning disclosures, and that second, French managers are expected to make voluntary disclosures in order to reduce market uncertainty. To test these hypotheses, a simultaneous equation model and an ordinary least square regression framework were estimated on a sample of 154 French‐listed firms between 1998 and 2001.

Findings

The results show that voluntary earning disclosures positively influence analyst coverage decision. They also show that voluntary disclosures improve the accuracy of analyst forecasts and reduce market uncertainty.

Research limitations/implications

The paper does not cover all forms of corporate voluntary disclosures.

Practical implications

The findings suggest that corporate disclosure policy is likely to change financial analysts' behaviour. The results are useful to both managers, wishing to meet market expectations and, to investors wishing to invest in richer informational environment firms.

Originality/value

This paper provides original results about the role of analysts in France as information intermediaries. These analysts pay little attention to French firms with a poor information environment in which minority shareholders are less inclined to ask for costly analyst coverage.

Details

Journal of Accounting & Organizational Change, vol. 5 no. 3
Type: Research Article
ISSN: 1832-5912

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Book part
Publication date: 24 March 2017

Anne H. Bowers, Henrich R. Greve and Hitoshi Mitsuhashi

Using data from securities analysts, who are awarded status by the third-party organization Institutional Investor magazine, we examine the emergence of competition and…

Abstract

Using data from securities analysts, who are awarded status by the third-party organization Institutional Investor magazine, we examine the emergence of competition and articulate a model of competitive response among actors aware of the importance of status and some of the dimensions on which it may be gained. We predict analysts’ initiating or ceasing coverage of stocks in response to other analysts initiating coverage on stocks they cover. We find that competition can emerge because of status seeking rather than as a response to own capabilities or market needs, with compelling, and potentially negative, market implications for overt status seeking.

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