The Effects of Current and Expanded Analyst Ownership Disclosure on Nonprofessional Investorss Judgments and Decision-Making

Abstract

In two experiments, this study examines the effects of current and expanded analyst ownership disclosure on nonprofessional investors’ confidence in analyst recommendations and on the amount invested by nonprofessionals. Experiment one examines how nonprofessional investors interpret analyst ownership disclosures currently required by Title V of the Sarbanes-Oxley Act of 2002. The results of experiment one suggest that current ownership disclosure requirements have no significant effect on either investors’ confidence in analysts’ recommendations or on the amount ultimately invested in the firm recommended by the analyst. Experiment two extends the first experiment by expanding the granularity of the ownership disclosures provided to investors to incorporate two additional factors: ownership magnitude and ownership duration. Applying Rational Choice Theory, we find evidence of an interactive effect on investors’ judgments such that investors who receive a disclosure that an analyst holds a large, short-term investment in a recommended firm perceive the analyst is more likely to be engaging in puffery than investors who receive alternative disclosures. We also find evidence of mediated-moderation such that investors’ confidence in the analyst’s report mediates the effect of the disclosure on the amount invested. In sum, we find evidence to suggest analyst ownership disclosures affect capital market liquidity and we discuss the implications of our findings for regulators and market operators seeking to improve investor confidence and market liquidity.