Are Investors Warned by Disclosure of Conflicts of Interest? The Moderating Effect of Investment Horizon

Abstract

Financial analysts are required to disclose conflicts of interest (COI) in their research reports, but there is limited evidence on the effectiveness of COI disclosures. We investigate whether the influence of disclosing COI in analyst reports on investors' decision making depends on investment horizon. Experimental results show that short-term investors who view a COI disclosure are significantly less willing to invest in the recommended stock compared to short-term investors who do not view such a disclosure, while the presence of a COI disclosure does not significantly affect long-term investors' willingness to invest. Results further demonstrate that the COI disclosure decreases short-term investors' willingness to invest by reducing their perception of analysts' trustworthiness and expertness. This study provides evidence on when and how the COI disclosure can influence investors' behavior and enhances our understanding of investors' reactions to cautionary disclaimers.

Mitigating the Influence of Analysts Who Issue Aggressive Stock Price Targets: The Role of Joint Versus Separate Evaluation*

“…We observe this pattern irrespective of whether the analyst who issues an aggressive price target also issues an aggressive earnings estimate (Experiment 1) or a nonaggressive earnings estimate (Experiment 2). Overall, we contribute to the literature on investors' judgments of financial analysts (Brav and Lehavy 2003;Shanthikumar 2007, 2014;Kelly et al 2012;Liu et al 2020). We show that when investors evaluate multiple analysts' price targets with other related information in the form of earnings estimates, by evaluating jointly rather than separately, investors are less susceptible to the influence of aggressive analysts.…”

“…Likewise, experimental research has also provided evidence that investors react to information provided by financial analysts (Hirst et al 1995;Kelly et al 2012;W. Chen and Tan 2013;Winchel 2015;Liu et al 2020).…”

“…Thus, if investors rely on analysts who issue these aggressive price targets, their welfare could be adversely affected. Regulators are concerned about investors being affected by analysts' strategic behavior, and researchers have identified features (e.g., including warnings or disclaimers) in analyst reports that can attenuate the effects of such behavior (Kelly et al 2012; Liu et al 2020). However, because investors may not notice these warnings or disclaimers, these measures might not be particularly effective.…”

Effects of regulatory enforcement style and audit firm remedial actions on investors' perceptions of audit quality

“…16 Collectively, our participants share similar investment knowledge and work experiences with participants representative of non-professional investors that Rennekamp (2012) and Liu et al (2020) recruited from MTurk (an online participant sourcing platform similar to Prolific) for their respective studies.…”

Impact of information risk and cost of equity: moderating role of investor attention

“…Kempf et al (2017) found that when shareholders are distracted (offer less than ideal monitoring), earning management becomes more challenging to detect due to the temporarily lower monitoring caused by investor distraction. If this is the case, managers would have more leeway to manipulate accruals and fundamental operations to inflate reported earnings (Chen et al , 2020; Liu et al , 2020). All accessible stock information cannot adequately inform retail investors due to the expense of both looking for and processing the information (Ying et al , 2015).…”