Information Environment Of Firms Research Articles

ADRs, Analysts, and Accuracy: Does Cross Listing in the United States Improve a Firm's Information Environment and Increase Market Value?

AbstractThis paper investigates the relation between cross listing in the United States and the information environment of non‐U.S. firms. We find that firms that cross list on U.S. exchanges have greater analyst coverage and increased forecast accuracy than firms that are not cross listed. A time‐series analysis shows that a change in analyst coverage and forecast accuracy occurs around cross listing. We also document that firms that have more analyst coverage and higher forecast accuracy have higher valuations. Furthermore, the change in firm value around cross listing is correlated with changes in analyst following and forecast accuracy, suggesting that cross listing enhances firm value through its effect on the firm's information environment. Our findings support the hypothesis that cross‐listed firms have better information environments, which are associated with higher market valuations.

Discussion of ADRs, Analysts, and Accuracy: Does Cross‐Listing in the United States Improve a Firm's Information Environment and Increase Market Value?

AbstractLang, Lins, and Miller [2002] investigate the relation between cross‐listing in the United States and information intermediation by analysts. The results suggest that cross‐listing in the United States increases analyst following and forecast accuracy and that both variables are associated with Tobin's Q. These findings are interesting and advance the cross‐listing literature in several ways. This discussion raises two issues. First, I highlight that the sources of cross‐listing effects are not obvious and are difficult to disentangle. To illustrate this point, I replicate the analysis using cross‐listed Canadian firms, for which mandated disclosures are held constant. Thus, if disclosure effects are important for documented cross‐listing effects, I expect to find no relation in the Canadian sample. The findings for forecast accuracy are consistent with this hypothesis. However, analyst following continues to be significantly higher for cross‐listed Canadian firms. These findings suggest that the sources of cross‐listing effects differ for analyst coverage and forecast accuracy. Second, I discuss the link between analyst variables, firm value, and cost of capital. As they are only tenuously related, I draw attention to some unresolved questions and areas for future research.

Discussion of ADRs, Analysts, and Accuracy: Does Cross Listing in the U.S. Improve a Firm's Information Environment and Increase Market Value?

Lang, Lins and Miller (2002) investigate the relation between cross listing in the U.S. and information intermediation by analysts. The results suggest that cross listing in the U.S. increases analyst following and forecast accuracy and that both variables are associated with Tobin's Q. These findings are interesting and advance the cross-listing literature in several ways. This discussion raises two issues. First, I highlight that the sources of cross-listing effects are not obvious and are difficult to disentangle. To illustrate this point, I replicate the analysis using cross-listed Canadian firms, for which mandated disclosures are held constant. Thus, if disclosure effects are important for documented cross-listing effects, I expect to find no relation in the Canadian sample. The findings for forecast accuracy are consistent with this hypothesis. However, analyst following continues to be significantly higher for cross-listed Canadian firms. These findings suggest that the sources of cross-listing effects differ for analyst coverage and forecast accuracy. Second, I discuss the link between analyst variables, firm value and cost of capital. As they are only tenuously related, I draw attention to some unresolved questions and areas for future research.

The Extreme Future Stock Returns Following Extreme Earnings Surprises

We investigate the stock returns subsequent to large quarterly earnings surprises, where the benchmark for an earnings surprise is the consensus analyst forecast. By defining the surprise relative to an analyst forecast rather than a time-series model of expected earnings, we document returns subsequent to earnings announcements that are much larger, persist for much longer, and are more heavily concentrated in the long portion of the hedge portfolio than shown in previous studies. We show that our results hold after controlling for risk and previously documented anomalies, and are positive for every quarter between 1988 and 2000. Finally, we explore the financial results and information environment of firms with extreme earnings surprises and find that they tend to be neglected stocks with relatively high book to market ratios, low analyst coverage, and high analyst forecast dispersion. In the three subsequent years, firms with extreme positive earnings surprises tend to have persistent earnings surprises in the same direction, strong growth in cash flows and earnings, and large increases in analyst coverage, relative to firms with extreme negative earnings surprises.

Level of Economic Development of a Firm's Country of Domicile and the Patterns in Stock Market Reaction Surrounding U.S. Earnings Announcements: A Test of the Global Market Segmentation Hypothesis

Using the level of economic development as a proxy for the degree of capital market segmentation, this study tests the global market segmentation hypothesis, which predicts that the magnitude of the market's reaction to an earnings announcement of an American Depositary Receipt (ADR) firm will vary systematically with the extent to which the firm's home country capital market is segmented. Supporting this idea, the evidence shows that the earnings announcement of an emerging economy ADR induces a larger market reaction than a developed economy ADR. This finding contributes to the market segmentation literature by providing evidence that the market can remain segmented even after cross-listing in the sense that the information environment of firms from segmented economies remains weaker. It also extends prior literature on the information content of earnings by documenting that the degree of capital market segmentation in a multinational firm's country of domicile is an important determinant of the information content of its U.S. earnings announcement.

Disclosure Quality and the Excess Value of Diversification

For a sample of U.S. firm years spanning the time period 1980 through 1996 we document a positive association between the excess value of diversification as defined by Berger and Ofek [1995] and security analyst ratings of voluntary disclosure as developed by the Association for Investment Management and Research (i.e., AIMR rankings). Our results are not attributable to differences in proxies for firm performance or information environment. Moreover, we find no relation between the excess values of single segment firms and their AIMR rankings. Taken together, these phenomena suggest that disclosure plays a monitoring role in disciplining management's operating decisions. We also examine an alternative proxy for disclosure quality that captures the degree of segment disaggregation, and document a positive association between this measure and excess value. Additional analyses of the association between non-market based measures of performance (i.e., return on assets) and our disclosure proxies provide mixed support for the monitoring effect hypothesis.

ADRs, Analysts, and Accuracy: Does Cross Listing in the U.S. Improve a Firm's Information Environment and Increase Market Value?

This paper investigates the relation between cross listing in the U.S., with its resulting commitment to increased disclosure, and the information environment of non-U.S. firms. We find that firms that cross-list on U.S. exchanges have greater analyst coverage and increased forecast accuracy relative to firms that are not cross listed. A time-series analysis shows that the change in analyst coverage and forecast accuracy occurs around cross listing. We also document that firms that have more analyst coverage and higher forecast accuracy have a higher valuation. Further, the change in firm value around cross listing is correlated with changes in the firm's information environment. Our findings support the hypothesis that cross-listed firms have better information environments, which are associated with higher market valuations.

The Characteristics of a Firm's Information Environment and the Predictive Ability of Insider Trades

This study examines the relation between the ability of insider trades to predict future returns and the availability of firm information. It investigates the marginal effect of three information sources: financial statements, analyst following, and firm information provided by voluntary disclosures or general news coverage. Timely disclosure of value relevant information reduces insiders' ability to trade profitably on private information. Investors acquire timely information from a variety of sources, and information provided by one source can affect the production of information by other sources. Thus, we examine these major sources simultaneously to understand the marginal effects of each. We find that the ability of insider trades to predict future returns diminishes in situations of increased analyst following and financial statement informativeness. However, we are unable to find a significant relation between the availability of company news and the predictive ability of insider trades.

Corporate Spinoffs and Information Asymmetry between Investors

We examine the effect of corporate spinoffs on the trading environment of the stock of firms that spinoff units. Spinoffs change the information environment of firms. The increased precision and quantity of information will change the relative advantage of informed traders. Consistent with increased information incorporation, residual return variance increases following spinoffs. Transaction costs and the price impact of trades are also higher in the quarter following spinoffs. These results are stronger for spinoffs where parent firms divest unrelated subsidiaries. Changes in the information environment associated with spinoffs appear to benefits informed traders at the expense of uninformed traders.

Acquisitions and the Information Environment of Firms

AbstractThis paper investigates how acquisitions affect analyst following of firms. Analyst following increases as a result of a merger. However, all of that increase can be attributed to the changes in firm‐specific characteristics resulting from the merger. Changes in analyst following around mergers are positively related to changes in firm size, expenditures on R&D, and the ratio of book to the market value of equity. Finally, the relatedness of merger appears to be an important determinant of analyst following of firms engaged in acquisitions.

The Effectiveness of the Insider-Trading Sanctions

T HIS study empirically examines the effects of increases in the level and enforcement of insider-trading regulations in the 1980s on corporate insiders.1 The main goal of the insider-trading regulations is to prevent insiders from trading on the basis of material, nonpublic corporate information. In addition, regulations require that insiders report their transactions to the Securities and Exchange Commission (SEC) and refrain from generating short-term profits by trading in their own firms' stocks. Regulations also prohibit insiders from short selling the securities of their firms.