Do Analysts Follow Managers Who Switch Companies? An Analysis of Relationships in the Capital Markets

Abstract

Abstract:We examine the importance of professional relationships developed between analysts and managers by investigating analyst coverage decisions in the context of CEO and CFO moves between publicly listed firms. We find that top executive moves from an origin firm to a destination firm trigger analysts following the origin firm to initiate coverage of the destination firm in 10% of our sample, which is significantly higher than in a matched sample. Analystmanager "co-migration" is significantly stronger when both firms are within the same industry. Analysts who move with managers to the destination firm exhibit more intense and accurate coverage of the origin firm than they do in other firms and compared to other analysts covering the origin firm. The advantage no longer holds after the executive's departure, and most of the analysts' advantage does not carry over to the destination firm. However, the analysts do increase the overall market capitalization of firms in their coverage portfolio. Our results hold after Regulation Fair Disclosure, suggesting that these relationships are not based on selective disclosure. Overall, the evidence shows both the importance and limitations of professional relations in capital markets.

Analyst Following, Information Environment and Value Relevance of Comprehensive Income: Evidence from China

“…analyst forecasting), so it can increase market participants' investing interest, or reduce the firm's cost of capital and increase firm value (Lang et al, 2003;Frankel et al, 2006;Hilary and Shen, 2013). 1 Brochet et al (2014) further argue that analyst coverage can increase overall market capitalization of a firm due to increasing demand stemming from expanded market exposure by analyst following. Therefore, greater analyst coverage generally indicates a better information environment or more transparent information disclosure (Byard et al, 2011;Chen et al, 2015).…”

“…An improved information environment is generally associated with an increase in firm value (Lys and Sohn, 1990;Lang et al, 2003;Barth and Hutton, 2004;Pronobis and Zulch, 2010;Degeorge et al, 2013). For instance, analyst coverage, which produces professional analysis and reduces information asymmetry of a target firm, may attract the following of investors since they can get more and better information about the firm's operating activities and performance prospect through professional analyst reports or earnings forecasts, thus, improving the firm's valuation decisions when other influential factors are controlled (Chen and Jian, 2006;Hilary and Shen, 2013;Brochet et al, 2014). Market analysts' interpretation or forecasting extends a firm's disclosure and mitigates information asymmetry, thus, CI and OCI reporting can aid investors to make a better prediction of its future earnings.…”

Analysts’ Forecasts and Asset Pricing: A Survey

“…Cohen, Frazzini, and Malloy (2010) show that shared backgrounds, as measured by education ties, serve as a conduit of information between managers and analysts and that these shared backgrounds result in less biased analysts' forecasts and more profitable investment recommendations in the pre-Regulation Fair Disclosure era (and it is still the case in the UK where Regulation Fair Disclosure restrictions do not apply). Related evidence in Brochet, Miller, and Srinivasan (2014) shows that analysts tend to initiate coverage of firms when they have a past relationship with the firms' management and these past relationships are associated with higher forecast accuracy. Overall, these studies suggest an influence of social and professional networks in both informing, and compromising the integrity of, analysts' outputs.…”

Does Religion Matter for Earnings Management?

“…In particular, we control for the presence of BIG4 auditors 4 (Barton, 2005), analyst following (Brochet, Miller and Srinivasan, 2013), profitability, audit tenure and growth opportunities because these factors impact on the choice of earnings management methods (McGuire et al 2012;Cohen and Zarowin, 2010). For example, Becker et al (1998) observe that there is a negative association between audit quality and earnings management.…”