Analyst Information Discovery and Interpretation Roles: A Topic Modeling Approach

Abstract

This study examines analyst information intermediary roles using a textual analysis of analyst reports and corporate disclosures. We employ a topic modeling methodology from computational linguistic research to compare the thematic content of a large sample of analyst reports issued promptly after earnings conference calls with the content of the calls themselves. We show that analysts discuss exclusive topics beyond those from conference calls and interpret topics from conference calls. In addition, we find that investors place a greater value on new information in analyst reports when managers face greater incentives to withhold value-relevant information. Analyst interpretation is particularly valuable when the processing costs of conference call information increase. Finally, we document that investors react to analyst report content that simply confirms managers' conference call discussions. Overall, our study shows that analysts play the information intermediary roles by discovering information beyond corporate disclosures and by clarifying and confirming corporate disclosures.

Are Low Equity R2 Firms More or Less Transparent? Evidence from the Corporate Bond Market

“…Frankel, Kothari, and Weber () point to the informational role of equity analysts through their comparative advantage in interpreting companies’ publicly disclosed information. Livnat and Zhang (), Huang, Zang, and Zheng (), Huang, Lehavy, Zang, and Zheng (), and Devos et al. (), among others, provide empirical evidence that the interpretation role played by analysts is critical for stock market participants investing in firms with impaired firm‐specific public information disclosure .…”

Textual Analysis in Accounting and Finance: A Survey

“…For example, You and Zhang [2009] use the median 10-K word count to classify firms into low-complexity and high-complexity groups. Other researchers have used the number of business segments or a Herfindahl Index based on segment revenue to capture firm-level complexity (see Huang et al [2015], Loughran and McDonald [2014]). Counter examples, however, are easy to generate.…”

Does equity analyst research lack rigour and objectivity? Evidence from conference call questions and research notes

“…While research reports offer a window into analysts' information acquisition and interpretation roles, their ability to cross-examine management directly during conference call Q&A provides incremental insights into their information gathering activities (Huang et al, 2015). Third, the marketing role of reports coupled with the structured nature of the narrative renders them particularly prone to the characteristics documented by Fogarty and Rogers (2005).…”

“…Third, we compare the properties of analysts' verbal and written research outputs. Huang et al (2015) is the only other study to the best of our knowledge that compares these modalities. While Huang et al (2015) test for differences in research themes, we compare the degree of rigour and objectivity associated with the two outputs.…”