The Regulatory Effect on the Performance of Financial Analysts: Time Series from Two Different Legal Systems

Christopher Von Koch

doi:10.4172/2167-0234.1000113

Abstract

The focus of this paper is the relationship between regulatory settings and financial analysts’ performance, which is examined by studying the level of shareholder protection and the performance of financial analysts in two countries with different legal origins. By using a newly constructed index to measure shareholder protection, we are able to analyze how changes in shareholder protection over time can affect analysts’ performance. By comparing two countries with different legal traditions (the United Kingdom (UK) and Sweden), we are also able to assess whether the underlying legal origin is an influential factor. The results show that increased shareholder protection improves forecast accuracy in both the UK and Sweden, supporting the idea that stronger shareholder protection regulations improve analysts’ performance whether the legal context is rooted in common law or Scandinavian civil law tradition. The findings also indicate that strengthened shareholder protection decreases forecast dispersion in Sweden and forecast bias in the UK, further supporting the idea that stronger shareholder protection improves analysts’ performance even though the results differed across legal contexts. We did, however, find a substitution effect in both countries: Strengthened shareholder protection makes analysts’ services less valuable to investors, thus leading to a reduction in the number of analysts. Our main conclusion is that changes in shareholder protection affect the performance of analysts irrespective of the country’s legal origin, i.e. common law or Scandinavian civil law. However, legal origin seems to have an impact on the magnitude of analysts’ performance based on changes in shareholder protection.

Highlights

Schipper [1] and Revsine et al [2] argue that analysts are considered among the most influential users of financial reports and among the most important information intermediaries between firms and investors
We did this by investigating whether strengthened shareholder protection has any effect on analysts’ performance and if this potential effect differs between countries with different legal traditions
We found that in both the United Kingdom (UK) and Sweden forecast error decreases with stronger shareholder protection; forecast dispersion decreases in Sweden and forecast bias in the UK

Summary

Introduction

Schipper [1] and Revsine et al [2] argue that analysts are considered among the most influential users of financial reports and among the most important information intermediaries between firms and investors. We use four dependent variables to measure analysts’ impact on information asymmetry: forecast accuracy, standard deviation of forecasts, number of analysts following the firm, and forecast bias. Models 2 and D2 test the second hypothesis and determine if there is a negative relationship between the shareholder protection and forecast dispersion by regressing the standard deviation of forecasts on the SPI value and the control variables. Models 3 and D3 test the third hypothesis to determine if whether a relationship exists between shareholder protection and the number of analysts following a firm These models regress the number of analysts on the SPI index value and the control variables. While prior evidence shows that both analyst following and the properties of the analysts’ forecast are affected by shareholder protection, the results should be interpreted with care as most research in this area has not taken into account the potentially endogenous nature of a firm’s shareholder protection and analyst following

Results

10 Std ROE

Conclusion