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Analyst Firm Coverage and Forecast Accuracy: The Effect of Regulation Fair Disclosure
Author(s) -
Dong Yi,
Hu Nan,
Li Xu,
Liu Ling
Publication year - 2017
Publication title -
abacus
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.632
H-Index - 45
eISSN - 1467-6281
pISSN - 0001-3072
DOI - 10.1111/abac.12120
Subject(s) - private information retrieval , portfolio , contrast (vision) , robustness (evolution) , public information , association (psychology) , econometrics , economics , business , actuarial science , accounting , monetary economics , computer science , financial economics , computer security , psychology , biochemistry , chemistry , internet privacy , artificial intelligence , psychotherapist , gene
In this study, we revisit the relationship between analyst firm coverage and forecast accuracy. In contrast to the proposed negative association in Clement (1999) owing to the portfolio complexity effect, we hypothesize an ‘economy‐of‐scale effect’ that is likely to dominate when analysts rely mostly on public information. In support of the latter effect, we find a positive association between firm coverage and forecast accuracy after the enactment of Regulation Fair Disclosure (Reg FD), which substantially reduces the flow of material private information to analysts. Such a result survives a battery of robustness analyses. We further show that, in the post‐Reg FD period, covering more firms increases an analyst's probability of being selected as a star analyst in the subsequent year. Overall, our findings highlight the importance of the information environment in shaping the economic link between an analyst's firm coverage and forecast accuracy.