How Effectively Analysts Play Their Roles in the Stock Market: Evidence from Three Scenarios Related to Corporate Misconduct

Abstract

Financial analysts play a role as information intermediaries in the stock market. They help investors with investment decision-making by providing earnings forecasts and stock recommendations. Yet, how effectively analysts play their roles as information intermediaries is still underexplored. To further shed light on this topic, my thesis, which consists of five papers, provides an overview of related prior studies and explores the effectiveness of analysts’ roles in three different scenarios related to corporate misconduct.
Chapter 2 provides an overview of the roles that financial analysts play in the stock market. Extant studies provide some evidence of analysts’ sophistication in interpreting various value- relevant information and inferring its implication for firms’ future prospect. However, how well analysts help investors understand the future prospect of firms is still an open question that warrants further research.
To answer this question, Chapters 3, 4, and 5 focus on three scenarios where firms commit misconduct and its implication for future earnings is difficult to infer. Chapter 3 investigates whether and how analyst coverage and forecasts are affected by real earnings management, which is hard to observe and process by outsiders. We find that, although analyst coverage is negatively associated with the extent of real earnings management, the error (informativeness) of analyst forecasts does not increase (decrease) as a result of real earnings management.
Chapter 4 examines whether and how analyst coverage and forecasts are shaped by potential errors in financial statements. Using the financial statement divergence (FSD) scores (Amiram et al. 2015) as the measure of financial statement errors, we find that, although financial statement errors lead to an increase in investors’ demand for analyst forecasts and in analyst coverage, analysts tend to commit more errors in their earnings forecasts.
Chapter 5 seeks to provide insights into how well analysts process the negative corporate information provided by a third party. To this end, we examine how analysts react to media coverage of the environment, social, and governance (ESG) issues about firms. We find that the media coverage increases the business risk and information risk of firms, thereby reducing analyst coverage, and enlarging the error and dispersion of analyst forecasts, to a larger extent.
Previous studies have examined the association between CSR and analyst behaviour. But their inferences cannot be used in an opposite manner to draw inferences on the impact of media- covered CSI on analyst coverage and forecasts, because the economic consequences of CSR to a firm are substantially different from those of CSI. To buttress the contribution of Chapter 5 to the related literature, Chapter 6 expounds the coexistence of, and the difference between, corporate social responsibility (CSR) and corporate social irresponsibility (CSI), and discusses their distinct economic consequences and factors that will affect these economic consequences. Chapter 7 concludes this thesis.