Analyst Coverage and Managers’ Disclosure of Forward-Looking Information

Abstract

Prior research documents that managers respond to an exogenous decrease in analyst coverage by increasing the quantity of a specific form of guidance (earnings forecasts), presumably to fill the information void left by a reduction in coverage. I extend this line of research by also considering the change in management forecast quality and an alternative form of guidance, managers’ forward-looking textual disclosures. First, although forecast quantity increases subsequent to loss of coverage and liquidity partially improves, I find forecast quality decreases (i.e., forecasts have larger signed and unsigned errors) and the decrease in quality attenuates the improvement in liquidity. These results suggest analysts not only play an informational role, but also a monitoring role with respect to managers’ forward-looking disclosures. These findings are more pronounced when (1) other monitors are not present to step in (i.e., dedicated intuitional owners and auditors) and (2) managers have incentives to engage in this disclosure behavior (i.e., engage in insider selling). Second, with respect to forward-looking textual disclosures, I find the quantity and net positivity of forward-looking textual disclosures in earnings announcements increase following loss of coverage. These results do not vary with other monitors’ presence, suggesting other parties do not monitor textual disclosures to the same extent as forecasting. However, the increase in net positivity of statements is concentrated in managers who engage in insider selling. Finally, I do not detect an improvement in liquidity from more textual disclosure or an association between net positivity and liquidity. Overall, my study provides a more nuanced view of analysts’ role in influencing firms’ disclosure of forward-looking information.