Do Corporate Disclosures Constrain Strategic Analyst Behavior?

Abstract

We show that analyst behavior changes in response to a randomly assigned shock that exogenously varies the timeliness and cost of accessing mandatory disclosures in the cross-section of investors: analysts reduce coverage and issue less optimistic, more accurate, less bold, and less informative forecasts. Our evidence indicates that analysts reduce a strategic component of their behavior: the changes are stronger among analysts with more strategic incentives like affiliated or retail-focused analysts. We conclude that mandatory disclosure can substitute for analyst information production, which is constrained by investors’ ability to verify forecasts using corporate filings.

Testing Disagreement Models

“…We differ from this work in that we focus on EDGAR's asset pricing consequences in the context of disagreement models. Chang, Ljungqvist, and Tseng (2021), the paper closest to ours, shows that EDGAR inclusion constrains strategic analyst behavior. Emery and Gulen (2019) and Gao and Huang (2020) view EDGAR as an IT improvement and show that it helps the retail customers of an online discount broker to overcome their home bias and improves the informativeness of their trades.…”

“…We use the final phase-in dates as per the December 1994 announcement. In doing so, we follow Chang, Ljungqvist, and Tseng (2021) but depart from Emery and Gulen (2019), Guo et al (2019), and Gao and Huang (2020), who use the preliminary dates.…”

“…Accordingly, investor disagreement is higher, the greater the dispersion in analysts’ earnings forecasts. A direct consequence of the reduced strategic behavior that Chang, Ljungqvist, and Tseng (2021) document post‐EDGAR is a reduction in dispersion in analyst forecasts and, by this argument, in investor disagreement.…”

“…Xiong (2013) argues that strategic behavior by analysts fuels disagreement between naïve and sophisticated investors. Chang, Ljungqvist, and Tseng (2021) find that EDGAR inclusion leads analysts to behave less strategically, reducing investor disagreement. Beyond these three mechanisms, online access to corporate filings makes stock prices more informative (Gao and Huang (2020)), which in and of itself should reduce disagreement.…”

“…Chang, Ljungqvist, and Tseng (2021) characterize the information-economic effects of EDGAR inclusion as a reduction in investors' costs of verifying the accuracy and veracity of information provided by information intermediaries such as sell-side stock analysts. In particular, reduced verification costs constrain analysts' ability to strategically skew their forecasts and recommendations in ways that benefit themselves or their brokerage firm employers.…”