The Real Effects of Financial Shocks: Evidence from Exogenous Changes in Analyst Coverage

Derrien, François; Kecskés, Ambrus

doi:10.2139/ssrn.1725539

Cited by 80 publications

(92 citation statements)

References 51 publications

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“…reporting attributes, such as disclosure quality and earnings predictability, that would make it easier to issue accurate forecasts. That analyst coverage decisions are so strongly motivated by investor demand for information about the company highlights the importance of analysts' investing clients and corroborates the idea that analyst following is a reasonable proxy for the firm's information environment (Bowen, Chen, and Cheng [2008], Derrien and Kecskés [2013]). We asked analysts for additional insights about their coverage decisions.…”

Section: T a B L E 1supporting

confidence: 56%

Inside the “Black Box” of Sell‐Side Financial Analysts

Brown

Call

Clement

et al. 2015

J of Accounting Research

952

491

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Our objective is to penetrate the "black box" of sell-side financial analysts by providing new insights into the inputs analysts use and the incentives they face. We survey 365 analysts and conduct 18 follow-up interviews covering a wide range of topics, including the inputs to analysts' earnings forecasts and stock recommendations, the value of their industry knowledge, the determinants of their compensation, the career benefits of Institutional Investor All-Star status, and the factors they consider indicative of high-quality earnings. One important finding is that private communication with management is a more useful input to analysts' earnings forecasts and stock recommendations than their own primary research, recent earnings performance, and

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Section: T a B L E 1supporting

confidence: 56%

Inside the “Black Box” of Sell‐Side Financial Analysts

Brown

Call

Clement

et al. 2015

J of Accounting Research

952

491

View full text Add to dashboard Cite

show abstract

“…Both events result in the termination of analyst coverage caused by the strategic changes of the brokerage firms rather than potential negative information about the covered firms (Kelly & Ljungqvist, 2012;Wu & Zang, 2009). Previous studies have used similar events to investigate the causal effect of analysts (see, for example, Derrien & Kecskés, 2013;Hong & Kacperczyk, 2010;Kelly & Ljungqvist, 2012). Employing a difference-in-difference (DiD) approach, we find that firms losing analyst coverage from these events experience a significant decline in the market valuation of their R&D capital -the valuation coefficient of R&D capital drops by about 21.7%, on average, of the pre-event level.…”

mentioning

confidence: 79%

“…Previous studies employing similar events find that firms losing analyst coverage from these events experience worse information environments, including increased analyst optimism bias (Hong & Kacperczyk, 2010), higher information asymmetry (Kelly & Ljungqvist, 2012), lower investor recognition (Li & You, 2015), and lower quality of financial reporting (Irani & Oesch, 2013). Furthermore, the adverse consequences transmit into firms' real activities such as lower levels of investment (Derrien & Kecskés, 2013) and slower growth (Billett, Garfinkel, & Yu, 2017). He and Tian (2013) find evidence of productive patenting activities after firms lose analyst coverage from brokerage closures or mergers and suggest that their findings could be reconciled with those of other studies if analysts prevent firms from over-investment in innovation and if the short-term performance pressure from analysts regarding patenting activities outweighs the benefits from reduced information asymmetry.…”

Section: Quasi-natural Experiments: Brokerage Firm Closures and Mergersmentioning

confidence: 99%

The information environment of the firm and the market valuation of R&D

Zhang

Toffanin

2018

Business Fin & Account

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We examine whether firms’ information environment influences the market valuation of their hard‐to‐value knowledge assets: R&D capital. We find that a better information environment, as measured by greater analyst coverage, lower earnings forecast dispersion, and greater earnings forecasting accuracy, is associated with higher stock market valuation of firms’ R&D capital. We conduct additional analyses to rule out alternative explanations and test for the direction of causality. Our causal evidence suggests that analysts significantly reduce the information uncertainty surrounding firms’ R&D capital.

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“…Derrien and Kecskés () explore the case of a decrease in analyst coverage. The authors hypothesize that a decrease in analyst coverage increases information asymmetry and thus increases the cost of capital; as a result, firms decrease investment and financing.…”

Section: Literature Reviewmentioning

confidence: 99%

The Impact of Financial Analyst Reports on Small Caps Prices in Italy

Guagliano¹,

Linciano²,

Contento³

2013

Economic Notes

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This paper examines the abnormal stock returns around the publication of 1167 reports issued by 26 brokerage firms on 37 small caps admitted to listing on the Italian Stock Market from 2003 to 2011. The focus is on small caps going public because for such firms information asymmetries may be severe and, therefore, analyst reports should be particularly valuable to the market. Several hypotheses are tested. First of all, the market impact is computed for the whole sample and for each recommendation category (buy, hold and sell). The exercise is repeated by controlling for the presence of contemporaneous news; by taking into account only the initiations of coverage; by selecting only the changes in recommendations. The results obtained through a standard event study methodology show that analyst reports on small caps are informative for the market, although the price impact differs across the samples considered. For the whole sample of reports, the cumulative abnormal returns estimated over a 3‐day event window around the publication date are statistically significant for buy and hold recommendations only (+0.98 and −0.83 per cent, respectively); however, after selecting out contaminating events only buys are significant (+1.13 per cent). Also the buy recommendations included in the initiation of coverage sample turn out to convey information to the market (+1.50 per cent); the highest price impact, however, is estimated for the upgrades included in the revisions of recommendation sample (+2.19 per cent). The second result of the paper is that information leakage is not widespread, given that abnormal returns are almost never significant before the report date. Therefore on average, the timing of the market reaction to financial research dissemination does not signal tipping or selective disclosure.

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The Real Effects of Financial Shocks: Evidence from Exogenous Changes in Analyst Coverage

Cited by 80 publications

References 51 publications

Inside the “Black Box” of Sell‐Side Financial Analysts

Inside the “Black Box” of Sell‐Side Financial Analysts

The information environment of the firm and the market valuation of R&D

The Impact of Financial Analyst Reports on Small Caps Prices in Italy

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