Silence is Golden: Discretionary Analyst Reporting and Stock Returns

Posted: 10 Dec 2011

See all articles by Eric C. Chang

Eric C. Chang

University of Hong Kong - School of Business

Zhelei Li

University of Hong Kong - School of Business

Date Written: December 8, 2011

Abstract

Classic agency theory predicts that analysts selectively provide coverage and report their expectations. This paper examines empirically if incremental investment value can be uncovered from analysts’ choice between silence and speech, measured as the level of reporting not explained by size or turnover. We find that “silence” negatively, and “speech” positively predicts future stock returns. More importantly, “speech is silver, silence is golden”, the observed price shift is mainly driven by silence, providing evidence that analysts’ inaction can impede the price discovery process. This is consistent with the claims that analysts’ expectations are based on valid information, that analyst self-selection is pervasive due to principal-agent conflicts, and that the loss of information with analyst silence has resulted in some mis-valuation which can be viewed as a form of classic agency cost.

Keywords: Analyst selective reporting, Analyst conflicts,Agency theory, Silence

JEL Classification: G14, G24

Suggested Citation

Chang, Eric Chieh C. and Li, Zhelei, Silence is Golden: Discretionary Analyst Reporting and Stock Returns (December 8, 2011). Available at SSRN: https://ssrn.com/abstract=1970073

Eric Chieh C. Chang (Contact Author)

University of Hong Kong - School of Business ( email )

Meng Wah Complex
Pokfulam Road
Hong Kong
China

Zhelei Li

University of Hong Kong - School of Business ( email )

Pokfulam Road
Hong Kong, Pokfulam HK
China

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