The effect of corporate transparency on financial analysts' forecast properties

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The effect of corporate transparency on financial analysts' forecast properties

 

Author: Cheung, Tak-yin Douglas
Title: The effect of corporate transparency on financial analysts' forecast properties
Degree: D.B.A.
Year: 2007
Subject: Hong Kong Polytechnic University -- Dissertations.
Business enterprises -- Finance.
Corporate governance.
Business forecasting.
Corporations -- Finance.
Department: Graduate School of Business
Pages: viii, 179 leaves ; 30 cm.
Language: English
InnoPac Record: http://library.polyu.edu.hk/record=b2145956
URI: http://theses.lib.polyu.edu.hk/handle/200/3101
Abstract: Financial analysts' ability to forecast accurately and their independence from the management of the companies that they prepare forecasts, are important factors affecting the public's trust in them. Research has found that the properties of financial analysts' forecasts are affected by a number of analyst-level factors such as financial analysts' affiliation and their skills and experience. However, as financial analysts' forecast accuracy is also dependent upon the information environment, I believe that in addition to analyst-level factors, corporate transparency at the firm-level is also an important contributing factor, which affects financial analysts' forecast properties. A high level of corporate transparency means more information is available to all financial analysts, which in turn, allows financial analysts to prepare more accurate forecasts. The government and securities regulators in the US are also aware of the situation in which, through private communication, financial analysts are very often influenced by the corporate management of the companies that they cover in their forecasts. As a result, a number of regulations, including Regulation Fair Disclosure ("Reg FD") have been introduced with the objective of reducing such influences. Reg FD is intended to reduce selective disclosure by corporate management to financial analysts and to level the communication among companies, financial analysts and the general investing public and in doing so this reduces the reliance of financial analysts on private communication with corporate management. However, Reg FD may lead to an overall reduction in information available to financial analysts, which then may also lead to a reduction in forecast accuracy. On the other hand, the reduction in private communication between a company and financial analysts may be compensated for by an increase in public communication, which helps to maintain the overall level of information available. In this research, it is hypothesized that Reg FD will reinforce the impact of corporate transparency on analysts' independence because opaque companies in the pre-Reg FD period would have been providing only limited private communication to financial analysts and Reg FD would have very limited impact on these companies. However, transparent companies were likely to be engaged in both private and public communication prior to Reg FD. With the enactment of Reg FD, these transparent companies are more likely to substitute private communication with additional voluntary public disclosures. In this research, using detailed financial analysts' forecasts and stock return information between 1997 and 2005, I examine the association between R2, the proxy measure of corporate transparency, and three measures of financial analysts' forecast properties, namely accuracy, bias and dispersion. In addition, the interaction between Reg FD and corporate transparency on financial analysts' forecast properties is also examined. It has been found that financial analysts' forecasts about companies with higher levels of corporate transparency are more accurate, less biased, and have smaller dispersion than forecasts about companies with lower levels of corporate transparency. Furthermore, the effects of corporate transparency on forecasts accuracy, bias and dispersion are more pronounced in the post-Reg FD period. This research makes a number of contributions in both theoretical and managerial aspects. Firstly, this is one of the first studies which examines the impact of a general level of corporate transparency on financial analysts' forecast properties and in particular their independence; after controlling for a number of key contributing factors, both at the analyst-level and company-level. Secondly, this research provides new evidence on the interaction effect of Reg FD and corporate transparency in improving financial analysts' forecast accuracy and reducing financial analysts' forecast bias. The research results provide insights for securities regulators, in enacting new regulations to promote financial analysts' independence. Thirdly, this is one of the first studies to use R2 to measure corporate transparency. Furthermore, the validity of R2 as proxy measure of corporate transparency has been confirmed by collaborating evidence from other proxy measures such as S&P Transparency and Disclosure Rankings and Barron, Kim, Lim and Steven (1988) precision of information measure ("BKLS measure").

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