Analyst firm coverage and forecast accuracy: The effect of regulation fair disclosure

• Main Authors: DONG, Yi, HU, Nan, LI, Xu, LIU, Ling
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2017
• Subjects: Analyst portfolio; Forecast accuracy; Information complementarity; Regulation FD; Databases and Information Systems; Finance and Financial Management; Portfolio and Security Analysis
• Online Access: https://ink.library.smu.edu.sg/sis_research/8048
• Institution: Singapore Management University

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.