Analyst Coverage and Managers' Disclosure of Forward-Looking Information

Prior research documents that managers respond to an exogenous decrease in analyst coverage by increasing the quantity of earnings forecasts, presumably to fill the information void left by a reduction in coverage. I extend this research by considering management forecast quality and an alternative form of guidance, managers’ forward-looking textual disclosures. First, although forecast quantity increases after loss of coverage and liquidity partially improves, I find forecast quality decreases (i.e., larger signed and unsigned errors) and the decrease in quality attenuates the improvement in liquidity. These results suggest analysts not only play an informational role, but also a monitoring role with respect to managers’ forward-looking disclosures. These findings are more pronounced when other monitors are less present and when managers have insider selling incentives to engage in this disclosure behavior. Second, with respect to textual disclosures, managers’ quantity and tone of forward-looking statements increase following loss of coverage. Although these results do not vary with the presence of other monitors, the increase in positive tone is concentrated in managers who engage in insider selling. Overall, my study provides a more nuanced view of analysts’ role in influencing managers’ forward-looking disclosures.