Barry Hettler, Justyna Skomra and Arno Forst
Motivated by significant global developments affecting the sell-side industry, in particular a shift toward passive investments and growing regulation, this study examines whether…
Abstract
Purpose
Motivated by significant global developments affecting the sell-side industry, in particular a shift toward passive investments and growing regulation, this study examines whether financial analyst coverage declined over the past decade and if any loss of analyst coverage is associated with a change in forecast accuracy.
Design/methodology/approach
After investigating, and confirming, a general decline in analyst following, the authors calculate the loss of analyst coverage relative to the firm-specific maximum between 2009 and 2013. In multivariate analyses, the authors then examine whether this loss of coverage differs across geographic region, firm size and capital market development, and whether it is associated with consensus analyst accuracy.
Findings
Results indicate that between 2011 and 2021, firm-specific analyst coverage globally declined 17.8%, while the decline in the EU was an even greater, 28.5%. Within the EU, results are most pronounced for small-cap firms. As a consequence of the loss of coverage, the authors observe a global decline in forecast accuracy, with EU small-cap firms and firms domiciled in EU non-developed capital markets faring the worst.
Originality/value
This study is the first to document a concerning global decline in analyst coverage over the past decade. The study results provide broad-based empirical support for anecdotal reports that smaller firms in the EU and those in EU non-developed capital markets bear the brunt of consequences stemming from changes in the sell-side analyst industry.
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Pervaiz Alam, Barry Hettler and Han Gao
This study aims to examine the association between predictive accounting downside risk measures and changes in credit spreads. Building upon the earnings downside risk (EDR…
Abstract
Purpose
This study aims to examine the association between predictive accounting downside risk measures and changes in credit spreads. Building upon the earnings downside risk (EDR) measure developed in prior literature, this paper introduces cash flow downside risk (CFDR).
Design/methodology/approach
This study modifies an existing empirical framework (root lower partial moment) to calculate CFDR and applies it to a sample of firms between 2002 and 2013 for which credit default swap data are available.
Findings
After validating the measure, this study identifies a positive association between CFDR and changes in credit spreads. This paper further shows the association between CFDR and credit spread changes is stronger than that between EDR and credit spread changes. Financial stability moderates the relationship between CFDR and credit spreads.
Originality/value
This study proposes a novel measure of accounting downside risk, CFDR and demonstrates a negative association between this measure and future cash flow and a positive association between this measure and future credit spreads.
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Justyna Skomra, Pervaiz Alam and Piotr Antoni Skomra
The paper aims to explore the impact of two types of monitoring mechanisms, namely, Securities and Exchange Commission (SEC) comment letters (CLs) and short sellers, on…
Abstract
Purpose
The paper aims to explore the impact of two types of monitoring mechanisms, namely, Securities and Exchange Commission (SEC) comment letters (CLs) and short sellers, on management’s demand for audit quality.
Design/methodology/approach
Using information on the short interest positions and a panel data of SEC CLs between 2005 and 2015, this study applies logit regression model to estimate the likelihood of hiring Big 4 and industry expert audit firm. This study also applies an ordinary least squares regression technique to estimate audit fees.
Findings
Consistent with disclosure and agency theories, results from empirical analyses provide that management demands higher quality audits measured by higher audit fees, and higher likelihood to hire Big 4 and industry expert audit firm. However, this study finds that the effect varies depending on the specific monitoring mechanisms. Additionally, when both monitoring mechanisms are in place, the SEC CLs drive the overall direction of the demand for audit quality when audit demand is captured by propensity to hire Big 4/industry expert audit firm.
Research limitations/implications
This study provides researchers with enhanced understanding of the factors having effect on the demand side for audit quality. Furthermore, it adds to the stream of literature on economic consequences of SEC CLs and short selling.
Originality/value
To the best of authors’ knowledge, this is the first comprehensive study to document the effect of two types of monitoring mechanisms, namely, SEC CLs and short selling, on the demand for audit quality.