Work

Does equity analyst research lack rigour and objectivity? Evidence from conference call questions and research notes

Year: 2016

Type: article

Abstract: Doubts have been raised about the rigour and objectivity of sell-side analysts’ research due to institutional structures that promote pro-management behaviour. However, research in psychology stresses the importance of controlling for biases in individuals’ inherent cognitive processing behaviour when drawing conclusions about their propensity to undertake careful scientific analysis. Using social cognition theory, we predict that the rigour and objectivity evident in analyst research is more pronounced following unexpected news in general and unexpected bad news in particular. We evaluate this prediction against the null hypothesis that analyst research consistently lacks rigour and objectivity to maintain good relations with management. Using U.S. firm earnings surprises as our conditioning event, we examine the content of analysts’ conference call questions and research notes to assess the properties of their research. We find that analysts’ notes and conference call questions display material levels of rigour and objectivity when earnings news is unexpectedly positive, and that these characteristics are more pronounced in response to unexpectedly poor earnings news. Results are consistent with analysts’ innate cognitive processing response counteracting institutional considerations when attributional search incentives are strong. Exploratory analysis suggests that studying verbal and written outputs provides a more complete picture of analysts’ work.

Source: Accounting and Business Research

DOI: 10.1080/00014788.2016.1230487

Authors: Catherine Salzedo, Steven Young, Mahmoud El-Haj

Institution: Lancaster University

Language: English

Topic: Auditing, Earnings Management, Governance

Subfield: Accounting

Field: Business, Management and Accounting

Domain: Social Sciences

Open Access status: green

Funder: Economic and Social Research Council

Awards: Understanding the Influences of Financial Reporting, Corporate Disclosures and Financial Media on the Corporate Financial Information Environment, G3785574317, G4751695717, G4962865153, ESRC Centre for Corpus Approaches to Social Science (CASS)