Analyst Coverage Decisions: The Role of Corporate Disclosure Choices and the Influence Effects of Peer Analysts’ Disclosure Preferences

Abstract

In this paper, we examine whether and how firms’ corporate disclosure policies influence the composition of an analyst’s research portfolio. We find that an analyst will tend to initiate (terminate) coverage of a firm if there is greater (lesser) alignment between: 1) the disclosure policy choices of the firm and the analyst’s disclosure preferences and 2) the disclosure preferences of the other analysts covering the firm and the analyst. The impact of the gap in the disclosure preferences of the analyst and other analysts following the firm is weaker if there is greater dispersion in these analysts’ disclosure preferences. Additionally, the analyst is less (more) likely to initiate (terminate) coverage of the firm if these other analysts are more likely to influence the firm to change its disclosure policies in a direction that will increase the gap between the firm’s disclosure policies and the analyst’s disclosure preferences. As a consequence of these coverage decisions, the dispersion in disclosure policy choices across an analyst’s research portfolio firms significantly decreases with the analyst’s general experience in the research industry. Furthermore, firms tend to align their disclosure policy choices with the preferences of their covering analysts, particularly when there is greater consensus in disclosure preferences among these analysts. These findings provide support for why analysts account for the potential influence effects of existing analysts in their coverage decisions. Our paper suggests that firms’ disclosure policy choices and the influence effects of peer analysts’ disclosure preferences are important considerations in analysts’ coverage decisions.

Keywords: Sell-side analysts; disclosure policy choices; coverage decisions; analyst influence effects

JEL Classification: G30, G32, G34, K22, L22, L25