Corporate Shareholder Engagement and Analyst Earnings Forecasts 

Abstract

We examine if direct communication between a firm and shareholders to exchange information and solicit shareholder views – corporate shareholder engagement – affects analyst assessment of a firm’s prospects. As a quasi-natural experiment that increases a firm’s shareholder engagement activities, we use Institutional Shareholder Services (ISS) investigation of corporate engagement activities. We find an increase in earnings forecast optimism for firms subject to ISS investigation and a reduced likelihood an analyst will terminate coverage of such firms. However, forecast accuracy decreases for these firms, which suggests actual earnings do not match up to more optimistic analyst views. The results are present only for firms subject to ISS investigation for the first time. Overall, the findings suggest that analysts consider firm corporate shareholder engagement to have a positive effect on firm performance. However, analysts overweight the impact of corporate engagement on earnings resulting in inaccurate earnings forecasts.