The reaction of analysts to management disclosures and firm characteristics: Conservatism and corporate governance

Abstract

This paper examines the effect of firm characteristics on analyst reaction to management disclosures. Prior studies have overlooked the fact that analysts can react differently as a result of firm characteristics that can affect the management forecasts’ credibility and usefulness, as well as specific situation like SEO or management forecast characteristics itself. This study extends this line of research by considering firm characteristics after controlling for factors with respect to management forecast characteristics that may affect analyst reaction. I provide evidence that good news management disclosures by firms with high levels of conservatism have more impact to the analysts; therefore, analysts react more to good news management disclosures issued by firms with a high level of conservatism than good news management disclosures that are issued by firms with low levels of conservatism. Similarly, the study finds that analysts react less to bad news management disclosure issued by firms with a high level of conservatism. I also find that analysts have a stronger reaction to management disclosures announced by firms with strong governance and a lower level of managerial ownership. These results show that firm characteristics are also factors that are considered by analysts in the revision of their earnings forecasts following management disclosure.