Effects of Corporate Operating and Financial Reporting Opacity on the Intensity of Analyst Forecast Activity

• In Event: Analyst Forecasts

Abstract

Investors’ demand for information on earnings arguably increases with the firm’s opacity. Analyst response to this demand is likely to differ, however, for operating opacity (which analysts can unravel with sufficient effort) and reporting opacity (which obscures the effects of economic events on reported earnings). We investigate analyst response to the firm’s opacity in the information discovery phase that precedes an earnings announcement and in the information analysis phase that begins with the earnings announcement. We find that the intensity of analyst forecast activity increases with operating opacity and decreases with reporting opacity in the information discovery phase. The intensity of analyst forecast activity increases with both types of opacity in the information analysis phase. Return responses to forecast revisions increase with both types of opacity and are strongest in the information discovery phase, suggesting that investors value analyst forecasts more highly as opacity increases.

Authors

• Senyo Y Tse, Texas A&M University

• Jennifer Wu Tucker, University of Florida