Greater Analyst Coverage Research Articles

Language similarity and IPO underpricing

In this study, we investigate whether language similarity between auditors and chairpersons mitigates IPO underpricing. We focus on China, a country with a high incidence of IPO underpricing. We define language similarity as the auditor and the chairperson sharing the same dialect. To measure this, we manually collect the identification (ID) numbers of auditors and chairpersons and construct a proxy for language similarity based on the birthplaces identified by their ID numbers. Our findings indicate that auditor-chairperson language similarity helps alleviate IPO underpricing. We also find that IPO companies are more likely to select auditors who share the same language with their chairpersons. Our results remain robust even after controlling for additional control variables and employing matching methods, 2SLS instrumental variables, and alternative measurements. The mechanism through which language similarity reduces IPO underpricing is by compensating for informational gaps in low-readability and high-similarity prospectuses through incremental information production. Furthermore, the effects of language similarity are more pronounced when IPO companies are audited by Big 10 audit firms, followed by greater analyst coverage, and are listed under the registration-based IPO regime. Our research confirms the significant role of language similarity in emerging capital markets.

How does analyst coverage influence corporate social responsibility (CSR)? The governance- and information-based perspectives.

Based on a sample of Chinese public manufacturing firms, this study empirically investigates whether and how analyst coverage drives corporate social responsibility (CSR) under different governance or information conditions. The results show that firms with greater analyst coverage take more social responsibility, representing magnified concerns and better CSR visibility for legitimacy and reputation. This relationship could be strengthened under high governance condition (high institutional ownership ratio, none CEO duality, low executive ownership) or low information situation (high earnings management and low accounting conservatism). These findings provide new evidence of information-based mechanism underlying the promotions of CSR in imperfect information environments.

Do Firm‐Specific Stock Price Crashes Lead to a Stimulation or Distortion of Market Information Efficiency?*

ABSTRACTUnlike prior research that focuses on determinants of firm‐specific stock price crashes (SPCs), we study the consequences of SPCs on market information efficiency. The tension underlying our research question stems from two competing explanations. As an unanticipated shock, an SPC could stimulate (distort) information efficiency by triggering investor rational attention (opinion divergence). Our identification strategy involves a difference‐in‐differences analysis in which SPC firms in the treatment sample are propensity score matched with non‐SPC firms in the industry‐peer control sample, as well as placebo tests for falsification. Consistent with the stimulation effect, we find an increase of the earnings response coefficient and a decrease in post‐earnings announcement drift, from the pre‐ to post‐SPC period, for SPC firms, but not for non‐SPC firms. Further analyses reveal that SPC firms attract increased investor attention, as reflected in greater analyst coverage and more investor access to firms' online financial filings following such an event. Using mutual fund flow redemption pressure based on hypothetical sales as an exogenous shock to SPCs, we provide evidence corroborating our causal interpretation of the main findings. Collectively, the evidence suggests that SPCs can attract increased investor attention, bringing about positive externalities by stimulating market information efficiency.

Financial reporting uniformity: Its relation to comparability and its impact on financial statement users

AbstractWe explore the relation between financial reporting uniformity and comparability. We also examine the effect of uniformity on analyst coverage, analyst forecast accuracy and analyst forecast dispersion. We develop a Compustat‐based financial statement account uniformity measure based on the presentation of common financial statement line items. We define uniformity using a Jaccard similarity index where a firm's non‐missing Compustat data items are compared to a prototypical firm for that industry year. We emphasize the conceptual difference between uniformity and comparability, and our tests do not show a significant association between uniformity and output‐based accounting comparability. However, we find that the association between account uniformity and comparability becomes positive in high research and development firms, while it becomes negative in firms with higher managerial discretion. We explore the association between uniformity and information processing efficiencies, and we show that our uniformity measure is positively associated with analyst coverage. Furthermore, we partition our uniformity measure into separate income statement and balance sheet components. We find that income statement uniformity is associated with higher forecast accuracy and lower forecast dispersion, while balance sheet uniformity is associated with greater analyst coverage. Finally, we provide further support for these findings using an XBRL‐based uniformity measure.

Financial institution shareholding and corporate innovation: Evidence from China

Existing literature on bank-firm ties mainly focuses on the financial decisions of non-financial firms when they are fully or partially owned or controlled by financial institutions (e.g., commercial banks, investment banks, insurance companies). However, there is an alternative pattern of tie between financial institutions and firms; that is, a non-financial firm invests a significant amount in banks or other financial institutions, which we refer to as financial institution shareholding (FIS). Little is known about how the investment decisions of non-financial firms are shaped by this FIS. We fill this gap by investigating the impact of FIS on corporate innovation in China. Our empirical results show that FIS impedes corporate innovation. Using a mediation model, we find that the negative effect of FIS on corporate innovation is brought about through managerial agency conflict. We also show that this negative impact is more pronounced among CEOs with shorter decision horizons, firms with greater analyst coverage, and firms whose stocks are more liquid. Furthermore, we find that FIS simultaneously results in the under-hiring of the highly educated workers critical to corporate innovation. Overall, our findings indicate that FIS causes firms to lose growth potential by exacerbating managerial agency conflict.

Oil price forecasts and security analysts: evidence from the oil industry

ABSTRACT This study examines the relation between the U.S. Energy Information Administration (EIA) oil forecasts and analyst earnings forecasts for oil firms. Analyst forecast biases (revisions) are positively related to EIA oil forecast biases (revisions) but only for firms with greater analyst coverage. For these firms, we also document a positive association between analyst revisions and future oil prices. This association becomes insignificant after the introduction of concurrent EIA oil forecast revisions, suggesting that security analysts might not possess incremental information on future oil prices.

Social connections between media and firm executives and the properties of media reporting

We study how social connections between top executives of media and listed firms affect the properties of media reporting. We find that socially connected media are significantly more likely to cover a firm than their unconnected counterparts. Their reporting is significantly more optimistically toned and contains significantly less information, and both of these effects are significantly mitigated when the firm has better information environment as represented by greater analyst coverage and larger firm size. Additional analyses show that characteristics of the underlying news, firm, or media also affect the effects of social connections on media reporting properties. Collectively, our evidence suggests the impairment of media independence when media and firms have social connections and the importance of alternative information sources in mitigating this effect.

Analyst Coverage and Audit Fees: International Evidence

Using 41,648 firm-year observations from 30 countries during the period 2000–2011, we investigate the relation between analyst coverage and audit fees. We also examine whether the adoption of International Financial Reporting Standards (IFRS) and shareholder protection at the country level interacts with analyst coverage to affect audit fees. We find that auditors charge firms higher fees when the firms have greater analyst coverage. This supports our argument pertaining to analyst pressure. The positive impact of analyst coverage on audit fees is weaker for firms that adopt IFRS and in countries where there is high shareholder protection. This study enhances an understanding of the effect of analyst coverage on audit fees in relation to IFRS adoption and shareholder protection levels in an international setting.

Top Management Teams’ Academic Experience and Firms’ Corporate Social Responsibility Voluntary Disclosure

ABSTRACTCorporate social responsibility (CSR) disclosure is becoming increasingly important for modern corporations. Focusing on voluntary CSR disclosure and drawing on upper echelons theory, we propose that voluntary CSR disclosure is the manifestation of managerial preferences (e.g., managers’ professional ethical values and standards). Specifically, we argue that top executives with an academic background tend to have higher professional and ethical standards than their non-academic counterparts. These standards lead them to act with self-restraint and to perceive CSR disclosure as an opportunity rather than a threat. Compared with non-academic executives, therefore, top executives with an academic background provide stakeholders with more CSR information. Based on a sample of publicly listed firms in China, we find a significant difference in voluntary CSR disclosure between firms led by academic executives and firms without academic top executives. This difference is smaller for firms that are state-owned, firms that are audited by large audit firms, and firms with greater analyst coverage. We contribute to the literature on CSR voluntary disclosure by providing an in-depth analysis of the effects of top management teams’ academic backgrounds.

The impact of analyst coverage and stock price synchronicity: Evidence from brokerage mergers and closures✰

We examine the impact of analyst coverage on stock price synchronicity using exogenous shocks of brokerage mergers and closures in a sample of Chinese firms. This approach effectively mitigates endogeneity between analyst coverage and stock price synchronicity. Our findings suggest that after brokerage mergers and closures, the reduced analyst coverage leads to a decrease in stock price synchronicity by using a difference-in-differences research design. Hence, greater analyst coverage likely only produces market-wide rather than firm-specific information in emerging markets.

The information environment of the firm and the market valuation of R&D

AbstractWe examine whether firms’ information environment influences the market valuation of their hard‐to‐value knowledge assets: R&D capital. We find that a better information environment, as measured by greater analyst coverage, lower earnings forecast dispersion, and greater earnings forecasting accuracy, is associated with higher stock market valuation of firms’ R&D capital. We conduct additional analyses to rule out alternative explanations and test for the direction of causality. Our causal evidence suggests that analysts significantly reduce the information uncertainty surrounding firms’ R&D capital.

Financial Reporting Uniformity: Its Consequences and Relation to Comparability

We develop a Compustat-based financial statement account uniformity measure based on the presentation of common financial statement line items. We define uniformity using a Jaccard similarity index where a firm’s non-missing Compustat data items are compared to a prototypical firm for that industry-year. We emphasize the conceptual difference between uniformity and comparability, and our tests do not show a significant association between uniformity and output-based accounting comparability. However, we find that the association between account uniformity and comparability becomes positive in high R&D firms, while it becomes negative in firms with higher managerial discretion. We demonstrate that our uniformity measure is positively associated with analyst coverage and analyst forecast accuracy, and negatively associated with analyst forecast dispersion, consistent with financial statement account uniformity being related to information processing efficiencies. Furthermore, we partition our uniformity measure into separate income statement and balance sheet components. We find that income statement uniformity is associated with higher forecast accuracy and lower forecast dispersion, while balance sheet uniformity is associated with greater analyst coverage.

Foreign residency rights and corporate fraud

We examine whether Chinese firms whose controlling persons have foreign residency rights are more likely to engage in corporate fraud. We find a positive association between foreign residency rights and corporate fraud with causality likely going from the former to the latter. Such a finding is robust to an estimation of a bivariate probit model that incorporates undetected fraud. In the cross section, higher managerial ownership, greater analyst coverage and higher institutional holdings mitigate this association. The link, however, diminishes in more recent years after high-profile extraditions of businessmen and regulatory focus on foreign residency rights in the political sector. We conclude that a lower expected probability of getting caught and punished associated with executives with foreign residency rights induces corporate fraud.

Does Exposure to Foreign Competition Affect Stock Liquidity? Evidence from Industry-Level Import Data

We examine the effect of trade liberalization on stock markets, and find a negative association between foreign competition and stock liquidity. Our results hold using an instrumental variable methodology and in a quasi-natural experiment setting. We identify a deterioration in the informational environment in response to increases in foreign competition, as the channel through which foreign competition affects stock liquidity. Specifically, we find that the negative effect that foreign competition has on stock liquidity is less evident amongst better monitored firms and firms with greater analyst coverage. Our paper is the first to highlight the unintended consequences of trade liberalisation on financial markets.

Analyst Coverage and the Likelihood of Meeting or Beating Analyst Earnings Forecasts

AbstractThis paper examines the relation between analyst coverage and whether firms meet or beat analyst earnings forecasts. We distinguish between whether a firm's reported quarterly earnings meet (i.e., equal or exceed by one cent) or beat (i.e., exceed by more than one cent) its consensus analyst earnings forecasts. We find a positive relation between analyst coverage and whether a firm meets or beats analyst forecasts. However, the more pronounced relation is that between analyst coverage and meeting analyst forecasts. Also, when we consider exogenous shocks to analyst coverage due to brokerage mergers or closures and conglomerate spinoffs, we continue to find a robust positive relation only between analyst coverage and meeting analyst forecasts. To shed light on the causal relation involved, we examine and find that greater analyst coverage is associated with a significantly larger market reaction to negative earnings surprises. We also document that firms with greater analyst coverage are more likely to guide analyst earnings forecasts downwards. Taken together, our evidence suggests that greater analyst coverage raises the pressure on managers to meet analyst earnings forecasts.

Analyst Coverage and the Likelihood of Meeting or Beating Analyst Earnings Forecasts

This paper examines the relation between analyst coverage and whether firms meet or beat analyst earnings forecasts. We distinguish between whether a firm’s reported quarterly earnings meet (i.e., equal or exceed by one cent) or beat (i.e., exceed by more than one cent) its consensus analyst earnings forecasts. We find a positive relation between analyst coverage and whether a firm meets or beats analyst forecasts. However, the more pronounced relation is that between analyst coverage and meeting analyst forecasts. Also, when we consider exogenous shocks to analyst coverage due to brokerage mergers or closures and conglomerate spinoffs, we continue to find a robust positive relation only between analyst coverage and meeting analyst forecasts. To shed light on the causal relation involved, we examine and find that greater analyst coverage is associated with a significantly larger market reaction to negative earnings surprises. We also document that firms with greater analyst coverage are more likely to guide analyst earnings forecasts downwards. Taken together, our evidence suggests that greater analyst coverage raises the pressure on managers to meet analyst earnings forecasts.

Venture Capital Backing, Investor Attention, and Initial Public Offerings

We propose and empirically analyze a new channel through which venture capitalists (VCs) may add value at IPO to the private firms that they invest in. We hypothesize that the IPOs of VC-backed firms garner greater “investor attention” (in the sense of Merton (1987)), allowing the IPO underwriters of such firms to perform two information-related roles more efficiently during the IPO book-building and road-show process: information dissemination, where the lead underwriter disseminates noisy information about various aspects of the IPO firm to institutional investors; and information extraction, where the lead underwriter extracts information useful in pricing the IPO firm equity from institutional investors. Based on this investor attention channel, we develop and test several implications for the IPO characteristics of VC-backed firms. We use a hand-collected dataset of pre-IPO media coverage as a proxy for investor attention in our empirical analysis. Our results are summarized as follows. First, IPOs of VC-backed firms attract greater investor attention than those of non-VC-backed firms; further, while the IPOs of both high- and low-reputation VC-backed firms attract greater investor attention than those of non-VC-backed firms, the IPOs of high-reputation VC-backed firms attract greater investor attention than those of low-reputation VC-backed firms. Second, VC-backed firms are associated with larger absolute values of IPO offer price revisions, greater IPO and after-market valuations, larger IPO initial returns, greater institutional investor equity holdings, and greater analyst coverage post-IPO. Our interaction tests reveal that, even after controlling for the direct effect of VC-backing, there is an incremental positive effect of higher investor attention received by VC-backed firms on various IPO characteristics. Our dynamic analysis of IPO firm valuation in the three years post-IPO shows that the valuation of VC-backed firms falls to a greater extent than those of non-VC-backed firms corresponding to investor attention fading with time, with the valuation of firms that received the greatest investor attention at IPO falling to the greatest extent. Our instrumental variable analysis shows that the positive relation we document between VC-backing, investor attention, and various IPO characteristics is causal.

Social trust and stock price crash risk: Evidence from China

We study the relation between social trust and stock price crash risk using a sample of Chinese publicly traded A-share stocks during 2001–2012. The crash-prone environment and China's culturally and economically diverse society provide a good background for the examination. We document that (1) social trust and stock price crash risk are negatively correlated and (2) this relation is less pronounced for firms with greater analyst coverage or high institutional ownership. Our findings are robust to alternative measures of crash risk and social trust and additional control variables. Our results also indicate that, as an informal institution, social trust and other formal institutional monitoring mechanisms are partial substitutes. Social trust, as a socioeconomic factor, relates to crash risk.

Diversification of pre-IPO ownership and foreign IPO performance

We examine the diversification of pre-IPO ownership of foreign-listed firms and how the presence of pre-IPO shareholders from the host country affects foreign issuer’s subsequent IPO and post-IPO activities. Using a sample of foreign-listed Chinese firms, we find that the presence of pre-IPO shareholders from the host country is associated with a significant reduction in direct and indirect IPO costs, especially for issuers without international sales and for firms operating at a loss. Benefits of such pre-IPO affiliation persist into the post-IPO period as manifested in greater analyst coverage and better acquisition performance in the host country. Our paper provides new insight on the value of pre-IPO ownership diversification and identifies one strategy that firms can use to overcome the liability of foreignness.

The effect of analyst coverage on CEO compensation structure: evidence from the S & P 1500

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.