Abstract
Research in industrial organization and strategic management has shown that rivals competing with each other in multiple markets are more willing to show each other mutual forbearance, i.e., compete less aggressively, within their spheres of influence, i.e., the markets in which each firm dominates. Sell-side equity analysts typically cover multiple stocks in common with their rivals. We examine the impact of this “multipoint contact” for mutual forbearance on two key dimensions of competition among security analysts: forecast accuracy and information leadership (issuing earnings forecasts or stock recommendations that influence rival analysts). We find that multipoint contact is associated with analysts exerting greater information leadership on stocks within their own spheres of influence. We also find greater forbearance related to information leadership under Regulation Fair Disclosure (Reg FD). In contrast, multipoint contact was not associated with greater forecast accuracy on stocks within analysts’ spheres of influence, either before or under Reg FD. Our analysis is among the first to consider mechanisms of competition among securities analysts and also adds to the literature on Reg FD by demonstrating that the increased workload imposed on analysts after Reg FD fostered mutual forbearance as a response. This paper was accepted by Mary Barth, accounting.
Highlights
Sell-side securities analysts are pivotal intermediaries in capital markets, and their performance and functioning have been a focus of extensive research in both accounting and finance
Our analysis focuses on three measures of analyst performance: forecast accuracy (H1, Hypothesis 4 (H4)) and two aspects of information leadership (H2, Hypothesis 3 (H3), Hypothesis 5 (H5), Hypothesis 6 (H6))
We estimate the impact of multipoint contact (MPC) on analyst forecast accuracy (ACC), forecast information leadership (FLFR), and recommendation information leadership (RLFR), conditioning on analyst stock-specific experience and portfolio size to test our hypotheses
Summary
Sell-side securities analysts are pivotal intermediaries in capital markets, and their performance and functioning have been a focus of extensive research in both accounting and finance. We focus on analysts’ accuracy and information leadership in both earnings forecasts and recommendations as possible competitive behaviors in which mutual forbearance may arise. Analysts do exhibit greater information leadership for both earnings forecasts and recommendations on stocks within their own spheres of influence This effect is stronger under Reg FD. We find no evidence of mutual forbearance being associated with increased forecast accuracy within analysts’ own spheres of influence, either before or under Reg FD These results contribute to the literature on sell-side security analysts by presenting one of the first analyses to consider mechanisms of competition among analysts and in particular the role of mutual forbearance in shaping competition among them through multipoint contact. It adds to the literature on the efficacy of Reg FD by documenting that an unintended consequence of its passage was increased mutual forbearance, which influenced patterns of competition for information leadership among analysts
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