Firm characteristics and analyst following (2023)

This study uses rolling regressions with panel data and conducts a dynamic analysis of the neglected firm effect, the negative relationship between the number of analysts and stock returns. For this reason, we use two samples of firms: one from the London Stock Exchange (LSE) and another from Bursa Malaysia (BM). The results reveal a significantly negative neglected firm effect only for the BM sample. In contrast the association between the number of analysts and stock returns is positive in some periods in the LSE. Size is not significant as a moderator, which suggests that the neglected firm effect does not vary with firm size, contrary to the findings in the previous literature. Finally, the neglected firm effect is nonstationary for both LSE and BM firms. Our results hold under a range of robustness tests and yield guidelines for investors regarding the types of markets and time periods for which analyst coverage is likely to matter most.

This study uses the quality of coverage decisions as a new metric to evaluate the performance of star and non-star analysts. We find that the coverage decisions of star analysts are better predictors of returns than those of non-star analysts. The return predictability of star analysts’ coverage decisions is stronger for informationally opaque stocks. We further exploit the staggered short selling deregulations, Google’s withdrawal, and the anti-corruption campaign as three quasi-natural experiments that create plausibly exogenous variations in the quality of information environment. These experiments show that the predictive power of star analysts’ coverage decisions strengthens (weakens) following a sharp deterioration (improvement) in firms’ information environment, consistent with the notion that star analysts possess superior ability to identify mispriced stocks. Overall, star analysts make better coverage decisions and play a superior role as information intermediaries, especially in poor information environment.

We hypothesize that analyst coverage reduces firms’ cost of capital and thereby facilitates more investments in organization capital, one of the most important intangible investments. To test our hypothesis, we use the exogenous variation in analyst coverage due to the mergers and closures of brokerages and measures of organization capital based on SG&A expenditures and text-based information manually collected from firms’ 10-K filings. Our results show that firms’ organization capital investments significantly decline with reduced analyst coverage. The post-event decline in organization capital is concentrated in firms with higher costs of capital, greater financial constraints, and greater dependence on external equity. Our findings are in contrast to other studies that have shown how the adverse effect of analyst coverage enhances managerial myopia and reduces corporate R&D.

We specify two measures of accounting estimation intensity (AEI) based on the textual analysis of the qualitative disclosures in the critical accounting policies (CAP) section of firms' MD&A. We then examine how these measures relate to financial analyst following and earnings forecast properties. Using a narrow dictionary definition of accounting estimates, we find AEI is positively associated with analyst following. It is also associated with increasing levels of private information in analysts' forecasts and the informativeness of analysts' reports when analysts engage in greater scrutiny of accounting estimates. Using a broader definition of accounting estimates yields a statistically significant relation with the informativeness of analysts' reports. Overall, our results are consistent with AEI stimulating investor demand for analysts' services and increasing the informativeness of these services.

The Securities and Exchange Commission (SEC) requires Form 8-K filings of quantitative deficiency notices. This study examines whether investors use these 8-K filings in a way that influences their investment decisions. Using abnormal returns, I show that investors react negatively to these 8-K filings. Reactions to filings are less negative for firms with more institutional investors. I also find that firms with more analyst following experience less negative market reaction, supporting the notion that 8-K filings are more informative when the firm's information environment is poor. I further document that equity and multiple deficiency notice filings elicit more negative reactions and are also more likely to result in actual delisting compared to bid price deficiency notice filings. Together, these results help us understand investors' perceptions and delisting risks associated with quantitative deficiency notice filings.

Digital mergers and acquisitions (M&As) are increasingly popular around the world. This study examines the effect of digital M&As on the market value of Chinese listed enterprises by combining transaction-level and firm-level datasets from 2010 to 2019. The results of event studies show that the announcement of digital M&As leads to a rise in the short- and medium-term market value of acquiring enterprises, especially the short-term effect is statistically significant. Further multivariate analyses, which employ a difference-in-differences (DID) strategy and propensity score matching (PSM) techniques, provide causal evidence that digital M&As have a positive market value effect on acquirers, which is greater than that of non-digital M&As. This effect survives a vast array of robustness checks and displays some heterogeneity. Finally, we further verify two underlying channels (i.e., innovation and analyst coverage) through which digital M&As achieve market value creation.

Pacific-Basin Finance Journal, Volume 25, 2013, pp. 217-239

We examine the relations among analyst coverage, analyst optimism, and firm-specific stock price crash risk. Using a unique Chinese database, we find that an increase in a firm's analyst coverage leads to an increase in stock price crash risk and this positive relation is more pronounced when analysts are more optimistic analysts and are affiliated with investment banks and brokerage firms with mutual funds relation. We also find some weak evidence to suggest that analyst optimism on crash risk is less pronounced when analysts have high personal reputations or are affiliated with reputable brokerage firms.

Journal of Accounting and Economics, Volume 67, Issues 2–3, 2019, pp. 306-335

We find that forecast revisions by analysts with more favorable surnames elicit stronger market reactions. The effect is stronger among firms with lower institutional ownership and for analysts with non-American first names. Following the 9/11 terrorist attacks, and France and Germany's opposition to the Iraq War, revisions by analysts with Middle Eastern and French or German surnames, respectively, generated weaker market reaction. Surname favorability is not associated with forecast quality, but it has complementary effects with forecast performance on analysts’ career outcomes. Surname favorability mitigates under-reaction to forecast revisions. These findings are distinct from the effects of ethnic, cultural proximity, or in-group bias.

Journal of Financial Economics, Volume 114, Issue 2, 2014, pp. 239-255

We examine whether access to management at broker-hosted investor conferences leads to more informative research by analysts. We find analyst recommendation changes have larger immediate price impacts when the analyst׳s firm has a conference-hosting relation with the company. The effect increases with hosting frequency and is strongest in the days following the conference. Conference-hosting brokers also issue more informative, accurate, and timely earnings forecasts than non-hosts. Our findings suggest that access to management remains an important source of analysts׳ informational advantage in the post-Regulation Fair Disclosure world.

Journal of Financial Economics, Volume 108, Issue 3, 2013, pp. 615-640

I provide evidence that investors overweight analyst forecasts by demonstrating that prices do not fully reflect predictable components of analyst errors, which conflicts with conclusions in prior research. I highlight estimation bias in traditional approaches and develop a new approach that reduces this bias. I estimate characteristic forecasts that map current firm characteristics into forecasts of future earnings. Contrasting characteristic and analyst forecasts predicts analyst forecast errors and revisions. I find abnormal returns to strategies that sort firms by predicted forecast errors, consistent with investors overweighting analyst forecasts and predictable biases in analyst forecasts influencing the information content of prices.

Journal of Accounting and Economics, Volume 59, Issue 1, 2015, pp. 41-59

Using hand-collected data on analyst locations, we study how geographic proximity affects analyst coverage decisions for U.S. firms that went public during 1996–2009, along with the impact of local coverage on firm visibility. Analysts are 80% more likely to cover local firms than non-local ones, and nearby non-underwriter analysts initiate coverage one to three weeks earlier than distant ones. Proximity matters most for smaller, less visible firms, for firms with less complex operations and for lower status analysts. Less visible firms may use local analyst coverage as a stepping-stone to increase visibility with other analysts and institutional investors.

Journal of Accounting and Economics, Volume 59, Issues 2–3, 2015, pp. 163-181

Recent research finds that many analyst recommendation revisions take place shortly after earnings announcements. Altinkilic and Hansen (2009) attribute the clustering of recommendations to analysts strategically piggybacking on earnings information to improve the perceived performance of their recommendations. This study proposes an alternative view: I find that analysts issue recommendations when they face greater demand from investors, when the relative supply of information available on earnings announcements is higher and when they detect mispricings. These results are consistent with analysts striving to meet the demands of investors by providing useful recommendations after earnings announcements.