Analyst Firm Coverage and Forecast Accuracy: The Effect of Regulation Fair Disclosure

35 Pages Posted: 17 Dec 2017

See all articles by Yi Dong

Yi Dong

Shanghai University of Finance and Economics

Nan Hu

Stevens Institute of Technology - School of Business

Xu Li

The University of Hong Kong

Ling Liu

University of Wisconsin Eau Claire

Date Written: December 2017

Abstract

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.

Keywords: Analyst portfolio, Forecast accuracy, Information complementarity, Regulation FD

Suggested Citation

Dong, Yi and Hu, Nan and Li, Xu and Liu, Ling, Analyst Firm Coverage and Forecast Accuracy: The Effect of Regulation Fair Disclosure (December 2017). Abacus, Vol. 53, Issue 4, pp. 450-484, 2017. Available at SSRN: https://ssrn.com/abstract=3088227 or http://dx.doi.org/10.1111/abac.12120

Yi Dong (Contact Author)

Shanghai University of Finance and Economics ( email )

Shanghai, Shanghai 200433
China

Nan Hu

Stevens Institute of Technology - School of Business ( email )

Hoboken, NJ 07030
United States

Xu Li

The University of Hong Kong ( email )

Pokfulam Road
Hong Kong, Pokfulam HK
China

Ling Liu

University of Wisconsin Eau Claire ( email )

Eau Claire, WI 54702
United States

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