Do Financial Analysts Restrain Insiders’ Informational Advantage?

Abstract

By collecting and disseminating price-sensitive information, financial analysts should reduce firm insiders’ informational advantage with a consequent impact on trading dynamics and market quality. We empirically examine the impact of complete analysts’ coverage termination on stocks’ liquidity, price discovery, and insider trading profitability. Termination leads to deteriorating liquidity and price efficiency, more informed trading, and higher profitability of insider trades. The magnitude of these effects depends on the strength of insiders’ ownership and on management’s decision whether to improve the firm’s information environment after coverage termination. Institutional investors alleviate, but do not eliminate, the negative effects of termination.

Analyst coverage and corporate misconduct

“…We first contribute to the literature on the effectiveness of analysts on corporate governance in a large emerging market. It has been well documented in the literature that analysts could convey the information to investors and reduce information asymmetry (Bhojraj, Hribar, Picconi, & McInnis, 2009; Ellul & Panayides, 2018; Lee & So, 2017), consequently providing monitoring in regulating earnings management (Yu, 2008) and financial reporting fraud (Chen et al, 2016) and mitigating managerial expropriation of wealth from outside shareholders (Chen et al, 2015). Competitively, another strand of literature has shown that analysts could cause excessive pressure on managers and exacerbate managerial myopia, which distort managerial incentives and impede corporate governance.…”

The effect of exogenous information on voluntary disclosure and market quality

“…these rms' stocks decreased. Ellul and Panayides (2018) use a statistical model to identify exogenous terminations of analyst coverage. They show that stocks of rms that have lost complete analyst coverage experience a decrease in both liquidity and price eciency.…”

“…This increased disclosure partially reverses the decrease in liquidity, although the overall eect remains negative, consistent with both predictions of our model. Ellul and Panayides (2018) divide their sample of rms that experienced unexpected coverage termination into those that increased the number of news releases in the post-termination period and those that kept the number unchanged or decreased it. They show that liquidity deteriorates less in the former group, suggesting again that rms disseminate more information to the market to mitigate the eect of the decrease in analyst coverage.…”

Complexity is never simple: Intangible intensity and analyst accuracy

“…Research has demonstrated the relevance of analyst activity as a mechanism to reduce information asymmetry and monitor managers' activity and incentives (Ellul & Panayides, 2018;Hong et al, 2000;Yu, 2008). Information asymmetry will, ceteris paribus, be greater in firms with high intangible intensity, given that intangible assets are, by definition, more complex, and that estimates of their fair values are rarely disclosed.…”