Financial Analysts Cover which Firms?

Iranian Journal of Accounting, Auditing and Finance

مقاله 18، دوره 7، شماره 3 - شماره پیاپی 24، آبان 2023، صفحه 105-115   

نوع مقاله: Original Article

شناسه دیجیتال (DOI): 10.22067/ijaaf.2023.43638.1289

نویسنده

Javad Rajabalizadeh^*

Department of Accounting and Finance, Turku School of Economics University of Turku, Finland

چکیده

This study explores the primary factors influencing the number of analysts following a firm. The research sample comprises 11,459 non-U.S. firms, followed by various unique analysts during 2019 and 2020. The study proposes a straightforward model of analyst following, identifying several firm characteristics likely to affect the aggregate demand or supply of analyst services for a particular firm. A regression model tests the relationship between analyst following and high-technology firms (as proxied by R&D expenses) and firm size. The results reveal that, in the following year, analysts are more inclined to follow firms with a higher volume of R&D expenses and larger size in the current year. The study also uncovers that most control variables regarding firm characteristics significantly affect analyst following. In summary, the empirical results are consistent with economic intuition.

کلیدواژه‌ها

Financial Analysts؛ Firms’ Coverage؛ R&D؛ Size

مراجع

1. Atiase, R. K. (1985). Predisclosure Information, Firm Capitalization, and Security Price Behavior Around Earnings Announcements, Journal of Accounting Research, 23(1), pp.21–36. https://doi.org/10.2307/2490905
2. Ayres, D. R., Campbell, J. L., Chyz, J. A., and Shipman, J. E. (2019). Do financial analysts compel firms to make accounting decisions? Evidence from goodwill impairments, Review of Accounting Studies, 24(4), pp. 1214–1251. https://doi.org/10.1007/s11142-019-09512-0
3. Bhushan, R. (1989). Firm characteristics and analyst following, Journal of Accounting & Economics, 11(2), pp. 255–274. https://doi.org/10.1016/0165-4101(89)90008-6
4. Brown, L. D., and Rozeff, M. S. (1978). The superiority of analysts’ forecasts as measures of expectations: Evidence from earnings, The Journal of Finance (New York), 33(1), pp.1–16. https://doi.org/10.1111/j.1540-6261.1978.tb03385.x
5. Butler, K. C., and Lang, L. H. (1991). The Forecast Accuracy of Individual Analysts: Evidence of Systematic Optimism and Pessimism, Journal of Accounting Research, 29(1), pp. 150–156. https://doi.org/10.2307/2491033
6. Cameron, A. C., and Trivedi, P. K. (2010). Microeconometrics using Stata, College Station, 23(4), TX: Stata Press, Maharashtra, India
7. Chen, T., Harford, J., and Lin, C. (2015). Do analysts matter for governance? Evidence from natural experiments, Journal of Financial Economics, 115(2), pp. 383–410. https://doi.org/10.1016/j.jfineco.2014.10.002
8. Choi, K. W., Chen, X., Wright, S., and Wu, H. (2014). Analysts’ Forecasts Following Forced CEO Changes, Abacus, 50(2), pp. 146–173. https://doi.org/10.1111/abac.12026
9. Chung, K. H., and Jo, H. (1996). The Impact of Security Analysts’ Monitoring and Marketing Functions on the Market Value of Firms, Journal of Financial and Quantitative Analysis, 31(4), pp. 493–512. https://doi.org/10.2307/2331357
10. Clement, M. B. (1999). Analyst forecast accuracy: Do ability, resources, and portfolio complexity matter? Journal of Accounting & Economics, 27(3), pp.285–303. https://doi.org/10.1016/S0165-4101(99)00013-0
11. Dechow, P. M., and Dichev, I. D. (2002). The Quality of Accruals and Earnings: The Role of Accrual Estimation Errors, The Accounting Review, 77(s-1), pp. 35–59. https://doi.org/10.2308/accr.2002.77.s-1.35
12. Dong, Y., Hu, N., Li, X., and Liu, L. (2017). Analyst Firm Coverage and Forecast Accuracy: The Effect of Regulation Fair Disclosure: Analyst Firm Coverage and Forecast Accuracy, Abacus (Sydney), 53(4), pp. 450–484. https://doi.org/10.1111/abac.12120
13. Duellman, S., Ahmed, A. S., and Abdel-Meguid, A. M. (2013). An empirical analysis of the effects of monitoring intensity on the relation between equity incentives and earnings management, Journal of Accounting and Public Policy, 32(6), pp. 495–517. https://doi.org/10.1016/j.jaccpubpol.2013.08.007
14. Easley, D., O’Hara, M., and Paperman, J. (1998). Financial analysts and information-based trade, Journal of Financial Markets (Amsterdam, Netherlands), 1(2), pp. 175–201. https://doi.org/10.1016/S1386-4181(98)00002-0
15. Ellul, A., and Panayides, M. (2018). Do Financial Analysts Restrain Insiders’ Informational Advantage? Journal of Financial and Quantitative Analysis, 53(1), pp. 203–241. https://doi.org/10.1017/S0022109017000990
16. Frankel, R., Kothari, S. P., and Weber, J. (2006). Determinants of the informativeness of analyst research, Journal of Accounting & Economics, 41(1), pp. 29–54. https://doi.org/10.1016/j.jacceco.2005.10.004
17. Freeman, R. N. (1987). The association between accounting earnings and security returns for large and small firms, Journal of Accounting & Economics, 9(2), pp. 195–228. https://doi.org/10.1016/0165-4101(87)90005-X
18. He, G., Ren, H. M., and Taffler, R. (2020). The impact of corporate tax avoidance on analyst coverage and forecasts, Review of Quantitative Finance and Accounting, 54(2), pp. 447–477. https://doi.org/10.1007/s11156-019-00795-7
19. He, J., and Tian, X. (2013). The dark side of analyst coverage: The case of innovation, Journal of Financial Economics, 109(3), pp. 856–878. https://doi.org/10.1016/j.jfineco.2013.04.001
20. Healy, P. M., and Palepu, K. G. (2001). Information asymmetry, corporate disclosure, and the capital markets: A review of the empirical disclosure literature, Journal of Accounting & Economics, 31(1), pp. 405–440. https://doi.org/10.1016/S0165-4101(01)00018-0
21. Hong, Y., Huseynov, F., and Zhang, W. (2014). Earnings Management and Analyst Following: A Simultaneous Equations Analysis: Earnings Management and Analyst Following, Financial Management, 43(2), pp. 355–390. https://doi.org/10.1111/fima.12043
22. Hribar, P., and McInnis, J. (2012). Investor Sentiment and Analysts’ Earnings Forecast Errors, Management Science, 58(2), pp. 293–307. https://doi.org/10.1287/mnsc.1110.1356
23. Irani, R. M., and Oesch, D. (2013). Monitoring and corporate disclosure: Evidence from a natural experiment, Journal of Financial Economics, 109(2), pp. 398–418. https://doi.org/10.1016/j.jfineco.2013.02.021
24. Karamanou, I. (2011). On the Determinants of Optimism in Financial Analyst Earnings Forecasts: The Effect of the Market’s Ability to Adjust for the Bias, Abacus (Sydney), 47(1), pp. 1–26. https://doi.org/10.1111/j.1467-6281.2011.00329.x
25. Krigman, L., Shaw, W. H., and Womack, K. L. (2001). Why do firms switch underwriters? Journal of Financial Economics, 60(2), pp. 245–284. https://doi.org/10.1016/S0304-405X(01)00045-9
26. Lang, M. H., and Lundholm, R. J. (1996). Corporate Disclosure Policy and Analyst Behavior, The Accounting Review, 71(4), pp. 467–492.
27. Lehavy, R., Li, F., and Merkley, K. (2011). The Effect of Annual Report Readability on Analyst Following and the Properties of Their Earnings Forecasts, The Accounting Review, 86(3), pp. 1087–1115. https://doi.org/10.2308/accr.00000043
28. Liu, A. Z. (2014). Can external monitoring affect corporate financial reporting and disclosure? Evidence from earnings and expectations management. Accounting Horizons, 28(3), pp. 529–559. https://doi.org/10.2308/acch-50771
29. Luo, J., Yin, H., and Zhang, H. (2020). The Disincentive Effect of Stars: Evidence From Analyst Coverage. Journal of Accounting, Auditing & Finance, 35(4), pp. 803–828. https://doi.org/10.1177/0148558X19832096
30. Madan, R., Sobhani, R., and Bhatia, P. (2003) Brokers & asset managers: initiating coverage—higher lows were nice, but lower highs will be the price. Citigroup/Smith Barney, New York.
31. Mak, C. Y. (2017). How do financial analysts interpret industrial firms’ corporate refocusing announcements? The British Accounting Review, 49(5), pp. 493–511. https://doi.org/10.1016/j.bar.2016.10.003
32. Mikhail, M. B., Walther, B. R., and Willis, R. H. (1997). Do Security Analysts Improve Their Performance with Experience? Journal of Accounting Research, 35(1), pp. 131–157. https://doi.org/10.2307/2491458
33. O’Brien, P. C. (1990). Forecast Accuracy of Individual Analysts in Nine Industries, Journal of Accounting Research, 28(2), pp. 286–304. https://doi.org/10.2307/2491151
34. O’Brien, P. C., and Bhushan, R. (1990). Analyst Following and Institutional Ownership, Journal of Accounting Research, 28(SUPP), pp. 55–76. https://doi.org/10.2307/2491247
35. Piotroski, J. D., and Roulstone, D. T. (2004). The Influence of Analysts, Institutional Investors, and Insiders on the Incorporation of Market, Industry, and Firm-Specific Information into Stock Prices. The Accounting Review, 79(4), pp. 1119–1151. https://doi.org/10.2308/accr.2004.79.4.1119
36. Premti, A., Garcia-Feijoo, L., and Madura, J. (2017). Information content of analyst recommendations in the banking industry, International Review of Financial Analysis, 49, pp. 35–47. https://doi.org/10.1016/j.irfa.2016.11.005
37. Qian, C., Lu, L. Y., and Yu, Y. (2019). Financial analyst coverage and corporate social performance: Evidence from natural experiments, Strategic Management Journal, 40(13), pp. 2271–2286. https://doi.org/10.1002/smj.3066
38. Roulstone, D. (2003). Analyst following and market liquidity, Contemporary Accounting Research, 20(3), pp. 551–578.
39. Sun, J. (2011). The Effect of Analyst Coverage on the Informativeness of Income Smoothing, The International Journal of Accounting, 46(3), pp. 333–349. https://doi.org/10.1016/j.intacc.2011.07.005
40. Sun, J., and Liu, G. (2011). The effect of analyst coverage on accounting conservatism, Managerial Finance, 37(1), pp. 5–20. https://doi.org/10.1108/03074351111092111
41. Wilson, M., and Wu, Y. (AVA). (2011). Do Publicly Signalled Earnings Management Incentives Affect Analyst Forecast Accuracy? Abacus (Sydney), 47(3), pp. 315–342. https://doi.org/10.1111/j.1467-6281.2011.00343.x
42. Wooldridge, J. M. (2010). Econometric analysis of cross section and panel data. Cambridge, MA: MIT Press, Cambridge, Massachusetts.
43. Yu, F. (2008). Analyst coverage and earnings management, Journal of Financial Economics, 88(2), pp. 245–271. https://doi.org/10.1016/j.jfineco.2007.05.008
44. Zhou, S., Simnett, R., and Green, W. (2017). Does Integrated Reporting Matter to the Capital Market? Abacus (Sydney), 53(1), pp. 94–132. https://doi.org/10.1111/abac.12104