Do voluntary disclosures of product and business expansion plans impact analyst coverage and forecasts?

He, Guanming; Marginson, David; Dai, Xixi

doi:10.1080/00014788.2018.1559717

Cited by 27 publications

(20 citation statements)

References 88 publications

(102 reference statements)

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“…We maintain the same control variables as per model ( 5). These control variables, as documented in prior literature (Lim, 2001;Huberts and Fuller, 1995;Das et al, 1998;He et al, 2019aHe et al, , 2019b, may affect analyst forecast errors. Table 6 reports the regression results.…”

Section: Effect Of Insider Trades On the Informativeness Of Analyst Forecast Revisionsmentioning

confidence: 87%

“…logtrade, lognetbuy and lognetsale are all constructed based on daily trading data; we aggregate daily inside trades to obtain overall trading volume over the first two fiscal quarters. Following prior research on the determinants of analyst coverage (Hayes, 1998;Mohanram and Sunder, 2006;He et al, 2019aHe et al, , 2019b, we include the following control variables in our regression models: research and development expenditures (rd), book-tomarket ratio (btm), size (size), firm beta (beta), stock return variance (retvol), stock price (price), stock returns (qtrret), trading volume (tradingvol), institutional stock ownership (insti), return on assets (roa), litigation risk (litigation) and an indicator variable for the post-Reg-FD period (fd). All control variables are defined in Table A1.…”

Section: Methodsmentioning

confidence: 99%

“…Because insider trades impact analyst forecast revisions, we further investigate how insider trading affects the informativeness of analyst forecast revisions. If insider trades convey value-relevant corporate information (Lakonishok and Lee, 2001;Fidrmuc et al, 2006;Veenman, 2012;He et al, 2019aHe et al, , 2019b, analysts' incorporation of insider trading ARJ 33,3 information into their earnings forecast revisions should make the revised forecasts more informative. If insider purchases are indeed more informative than insider sales, analyst forecast revisions made in response to insider purchases should be more informative than that made in response to insider sales.…”

Section: Effect Of Insider Trades On the Informativeness Of Analyst Forecast Revisionsmentioning

confidence: 99%

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The impact of insider trading on analyst coverage and forecasts

Marginson

2020

ARJ

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Purpose The purpose of this study is to examine the effect of insider trading on analyst coverage and the properties of analyst earnings forecasts. Given the central role of analysts for information diffusion in stock markets, advancing understanding of the role insider trades may play in analyst coverage and forecasts, especially in the context of a changing legal environment (e.g. the implementation of Regulation Fair Disclosure [Reg FD]), should be a worthy goal. Design/methodology/approach To address the research questions, the authors run regressions in which the authors identify and control for as many possible determinants of analyst coverage and forecasts (e.g. firm size, information asymmetry and earnings performance) that are correlated with insider trades. To alleviate endogeneity concerns, the authors use three approaches. First, the authors extend the sample period to the post-Reg-FD period in which managers are not allowed to provide private information to financial analysts. Second, the authors measure analyst coverage in a window that is lagged by insider trades. Third, the authors employ firm-fixed-effects regressions in all the multivariate tests. Finally, following Larcker and Rusticus (2010), the authors conduct the impact threshold for a confounding variable test to assure that all regression analyses are indeed immune to the potential correlated-omitted-variable bias. Findings The authors find that the level of analyst coverage is positively related to the intensity of insider trades and that analyst coverage is more strongly associated with insider purchases than with insider sales. The authors also find that the positive association between analyst coverage and insider trades is less pronounced after the passage of Reg FD. Further investigations reveal that analysts revise their earnings forecasts upward following insider purchases, the informativeness of analyst forecast revisions significantly increases following insider purchases and optimistic bias in analyst forecast revisions is reduced as a result of insider purchases; the authors do not find similar evidence for insider sales. Research limitations/implications A large body of insider trading literature (Johnson et al., 2009; Badertscher et al., 2011; Thevenot 2012; Skaife et al., 2013; Billings and Cedergren 2015; Dechow et al., 2016) provides evidence that insiders actively trade on their private information, such as their foreknowledge of price-relevant corporate events. This literature suggests that insider trades are potentially value-relevant and are informative about a firm’s future prospects. However, less research attention has been paid to investigating how insider trades might affect market participants’ (especially sophisticated participants’) behavior. This study contributes to understanding the role that insider trading may play in shaping analyst behavior. Practical implications Prior research (Frankel and Li, 2004; Lustgarten and Mande, 1995; Carpenter and Remmers, 2001; Seyhun, 1990) maintains that insider sales are less informative about a firm’s future prospects than are insider purchases because insider sales might take place for the liquidity and diversification purposes. By probing the stock price responses to insider selling activities, Lakonishok and Lee (2001), Jeng et al. (2003) and Fidrmuc et al. (2006) infer that insider selling is not informative about future firm performance. However, for such an inference, the authors cannot rule out the possibility that insider sales do convey value-relevant information, but the stock market does not react correctly to such trading information (Beneish and Vargus, 2002). Because the authors focus on examining analysts’ responses to insider sales, and analysts are supposed to be sophisticated in information processing, this study adds more compelling evidence for the notion that insider sales convey less information about a firm’s future prospects than do insider purchases. Social implications There is an ongoing debate about the benefits and drawbacks of insider trading. Opponents of insider trading view insider trades as inequitable and immoral and assert that restricting insider trades curbs resource misallocation and benefits the whole society. Proponents contend that insider trading accelerates the price discovery process, increases market efficiency (Leland, 1992; Bernhardt et al., 1995; Choi et al., 2016) and may even play a role in rewarding and motivating executives (Roulstone, 2003; Denis and Xu, 2013). The authors add to this debate by documenting that insider trading increases the amount of information valuable to analyst research activities and helps enhance analyst services. Originality/value To the best of the authors’ knowledge, this study is the first to offer firm-level evidence of a positive association between insider trades and analyst coverage. By accounting for the post-Reg-FD regime, this paper is also the first to provide evidence on how analysts, in the absence of access to management’s private information because of the regime change by Reg FD, react to insider trades.

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Section: Effect Of Insider Trades On the Informativeness Of Analyst Forecast Revisionsmentioning

confidence: 87%

Section: Methodsmentioning

confidence: 99%

Section: Effect Of Insider Trades On the Informativeness Of Analyst Forecast Revisionsmentioning

confidence: 99%

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The impact of insider trading on analyst coverage and forecasts

Marginson

2020

ARJ

Self Cite

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“…Prior studies (e.g. Lang and Lundholm 1996;Chang et al 2006;He et al 2019) provide evidence that analyst coverage is related to information asymmetry. Therefore, we include in our regression model research and development expenditures (rd), intangible assets (intangible), and book-to-market ratio (btm), which are used in prior literature as proxies for information asymmetry.…”

Section: Multivariate Tests Of H1mentioning

confidence: 99%

The impact of corporate tax avoidance on analyst coverage and forecasts

Ren

Taffler

2019

Rev Quant Finan Acc

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Corporate tax avoidance is likely to be associated with a high level of earnings management and with high financial opacity in the time-series. On this basis, we hypothesize that analyst coverage is negatively associated with corporate tax avoidance. Our results confirm this conjecture, and are robust to using a firm-fixed-effects model and a quasi-natural experiment to control for potential endogeneity. Additional analysis shows that analyst coverage is negatively related to tax risk, but there is no evidence that the informativeness of, or errors in, analyst forecasts are associated with tax avoidance. Overall, our study advances understanding of the implications of corporate tax avoidance for analyst behavior.

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“…However, well-known econometric studies have noted that OLS regression analyses may suffer from uncontrolled systematic differences that may affect our hypothesized relationship [40,41]. To alleviate this endogeneity concern, we also applied Rosenbaum and Rubin's [42] PSM methodology to our empirical analysis. We see the probable existence of systematic differences based on both the CEO inside debt holdings and the IO, and we attempt to reduce these systematic differences to some extent.…”

Section: Samplementioning

confidence: 99%

The Role of Institutional Investors in the Sustainable CEO Compensation Structure

Park

Kim

2019

Sustainability

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Chief executive officer (CEO) retirement pension plans are known as sustainable compensation because they induce managers to make more sustainable and long-term-oriented corporate decisions. We focused on the role of institutional investors in awarding CEO pension plans. Long-term and short-term institutional investors are expected to increase and decrease the CEO pension plan, respectively, wherein the former is aimed at persuading the manager to focus more on the firm’s long-term performance and the latter is aimed at making the CEO assume more risk. We empirically tested our hypothesis and found significantly negative (positive) relationship between short-term (long-term) institutional ownership and CEO pension plans, which is consistent with our hypothesis. Our results suggest the institutional ownership horizon’s differing impact on managers’ sustainable compensation structure.

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Do voluntary disclosures of product and business expansion plans impact analyst coverage and forecasts?

Cited by 27 publications

References 88 publications

The impact of insider trading on analyst coverage and forecasts

The impact of insider trading on analyst coverage and forecasts

The impact of corporate tax avoidance on analyst coverage and forecasts

The Role of Institutional Investors in the Sustainable CEO Compensation Structure

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