Do Opinions on Financial Misstatement Firms Affect Analysts’ Reputation with Investors? Evidence from Reputational Spillovers

Abstract

We examine whether opinions on firms subsequently revealed to have misstated earnings affect analysts' reputation with investors. We find that positive opinions by bullish analysts hurt their reputation, leading investors to react less to their research on non-misstatement firms after the misstatement revelation (i.e., negative spillovers). We also find that bearish analysts issuing more * Boston College.Accepted by Douglas Skinner. We thank the Carroll School of Management at Boston College for financial support. We are grateful to an anonymous reviewer for helpful suggestions that greatly improved this paper. We would also like to thank negative opinions gain reputation and experience positive spillovers. Finally, for analysts who dropped coverage of the misstatement firm before the misstatement revelation, we find no spillovers, which suggests that analysts experience limited reputational gains when they did not issue a public negative opinion. JEL codes: G10; M40; M41

Financial reputation repair through environmental performance

“…First, the proxy COVERAGE measures the number of financial analysts following the company, with the expectation that analysts drop coverage when receiving negative information (Young and Peng, 2013), such as the announcement of a restatement (Dechow et al , 1996; Griffin, 2003). Second, the proxy RECOMM , which is the median analysts’ recommendations, expects a downward adjustment of analysts’ advice in the aftermath of restatements (Lee and Lo, 2016). We coded median analyst stock recommendations into five ordered categories (1 = “Strong Sell,” 2 = “Sell,” 3 = “Hold,” 4 = “Buy” and 5 = “Strong Buy”), with a larger number representing better stock recommendations.…”

Interorganizational Spillover: A Review and a Proposal for Future Research

“…Like peer organizational response to spillover, responses by stakeholders of peer organizations are also formulated to events occurring at a focal organization as such events may change the stakeholders’ perceptions of peer organizations. Existing research has focused on external stakeholders, such as investors (Gande & Lewis, 2009), the media (Zavyalova et al, 2012), regulatory bodies (Fremeth et al, 2021), financial analysts (Lee & Lo, 2016), customers (Bourdeau, Cronin, & Voorhees, 2007), and suppliers (Nalick et al, 2019). Most of those studies (Barnett & King, 2008; Burchard et al, 2020; Zavyalova et al, 2012) have focused on the perception spillover of nonstrategic events to peer organizations’ stakeholders, and relatively less attention has been devoted to investigating the perception spillover of strategic events to peer organizations’ stakeholders.…”

“…Scholars from different disciplines, including strategy (Chang & Xu, 2008; M.-P. Kang, Mahoney, & Tan, 2009), organization theory (E. Kang, 2008; Kostova & Zaheer, 1999; Zavyalova, Pfarrer, Reger, & Shapiro, 2012), accounting (Lee & Lo, 2016), and finance (Albuquerque, Brandão-Marques, Ferreira, & Matos, 2019; Denis, Jochem, & Rajamani, 2020), have studied the spillover effect of events such as CEO dismissal (Connelly, Li, Shi, & Lee, 2020), financial misconduct (E. Kang, 2008), social activism (Fremeth, Holburn, & Piazza, 2021), and shareholder activism (Gantchev, Gredil, & Jotikasthira, 2019; Shi, Connelly, Hoskisson, & Ketchen, 2020) from a focal organization to its peer organizations and their stakeholders.…”

SEC enforcement targets: a Christian virtue ethics perspective

“…Investors accord less substance to reported earnings when later AAERs identify the numbers as being fraudulent (Hui et al, 2014). Additionally, investors react less to analysts after the analyst provides a positive opinion on misreported financials (Lee and Lo, 2016). AAER target firms experience a significant decrease in the information content of their earnings over a prolonged period after the firm misreports earnings (Chen et al, 2014).…”