A TEAM of German researchers from Goethe University Frankfurt have published a study that finds evidence to suggest that corporate executives are sharing material, non-public information in private earnings calls and conferences with select groups of invited analysts.
The authors point out that there is no European equivalent of Regulation FD in the United States, which would encourage companies to open up their earnings calls or conferences to the public, such as through webcasts, and that their findings suggest that current practice is not consistent with the goal of European regulators to provide a level playing field among investors.
Entitled Do Analyst Conferences Provide Informational Benefits? Evidence from Analyst Forecast Properties in a Non-US Forecasting Environment, the study is believed to be the first to analyze the informational role of analyst conferences in a non-US type forecasting environment. The work examined the impact of conferences and earnings calls with listed German firms on upcoming annual earning forecasts by analysts, specifically looking at the impact on forecast error and forecast dispersion.
In Germany, unlike the US following the implementation of Reg FD, most analyst conferences are conducted as “closed calls” with access restricted to invited participants only.
I spoke with the research team of Julian Pachta, Zoltan Novotny-Farkas and Moritz Bassemir to find out more about their recent work and its possible implications.
What is the background of the research team?
Moritz Bassemir: We are all from Goethe University Frankfurt. Zoltan and I are fourth-year accounting PhD. students at the chair of Prof. Günther Gebhardt. Zoltan is also a member of the INTACCT research network. INTACCT is dedicated to accounting and capital markets research at the top international level and is a major collaboration between some of the leading universities in Europe like Lancaster University, HEC Paris and Goethe University Frankfurt. Julian graduated from Goethe University and is currently working for an international investment-banking firm in Frankfurt. Our research interests are mainly concerned with the interaction of firm disclosure and capital markets.
What inspired the research? Why has European research in this area lagged the US?
Julian Pachta: Analyst conferences and calls are an interesting disclosure event. They differ from other forms of disclosure due to their unscripted, interactive nature which allows analysts to pose open questions to management and to potentially elicit information that is not disclosed otherwise. Over the last years we observed that an increasing number of firms in Germany had started to host analyst conferences on a regular basis. At the same time, overall disclosure levels in Germany have been characterized as being low. We were interested in seeing how the establishment of analyst conferences as a disclosure channel affects analysts’ forecasts in such an information environment.
I think the main reason why European research in this particular area lags behind the US is that analyst conferences have only recently been established in Continental Europe, while US companies have already used analyst conferences on a broader scale since the 90s. However, it is also a general observation that, compared to the US forecasting environment, work on analysts’ forecasts in Europe is at a more nascent stage.
What do you see as the main differences between the US forecasting environment and Germany?
Moritz Bassemir: The German forecasting environment differs along various dimensions from the US setting. To give you some examples, prior research has shown that German analysts’ forecasting accuracy is relatively poor compared to that of analysts from Anglo-Saxon countries. Their recommendations add less value than the recommendations of US analysts, quarterly forecasts are less common, and a smaller number of public firms are covered by analysts. Also, German analysts have less experience than their US counterparts, and German brokerage houses are smaller.
The differences in the forecasting environment can, at least partly, be explained by the stronger insider-orientation of the German disclosure system. That is, information asymmetries are largely resolved via private information channels and therefore analysts’ forecasts play a relatively minor role as a source of information. Let me also add that given these differences we think it might not be appropriate to assume that results documented in the US equally apply to other institutional settings. This further underlines the need for research on this topic in a non-US forecasting environment.
What would you describe as the key finding from the report?
Zoltan Novotny-Farkas: In my view, the key finding of our study is that analyst conferences provide valuable new information to participants that cannot be accessed through other information channels like earnings announcements or financial statements. Specifically, our results show that both consensus forecast error and individual forecast errors decrease more in quarters where firms host analyst conferences in conjunction with earnings announcements than in quarters where firms do not host analyst conferences concurrent with the earnings announcement. The relatively greater decrease in the mean forecast error persists over time, which indicates a sustained effect of conference calls on the information set of analysts.
We also shed light on the question whether all financial analysts benefit equally from the information disseminated during analyst conferences. To this end we partition analysts into high- and low-ability analysts based on their prior forecasting ability. We show that neither of those groups benefits more from analyst conferences. Further, we find that forecast dispersion is largely unaffected by analyst conferences.
Aren’t analyst conferences just a more efficient way of communicating the same information?
Moritz Bassemir: This is an excellent question and a key issue we had to deal with in our study. You are right in that analyst conferences may merely contain the information already provided through other types of disclosure like earnings releases, financial statements, etc. Actually, a frequently cited motivation for hosting conference calls is their use as a substitute for direct contact with analysts. Then, analyst conferences serve as a more efficient means to communicate the same information that otherwise would be disclosed through other channels. If this is the case, however, we should not see a greater decrease in forecast error in conference call-quarters than in non-conference call quarters.
Our result that analysts do infer valuable new information from conference calls, however, is plausible for several reasons. In our discussions with analysts they particularly emphasized the advantage of the open, interactive nature of the questions-and-answers section where analysts have the opportunity to elicit additional information that was not discussed in the earnings release. They also pointed out that conference calls convey valuable information beyond the earnings numbers, for instance, through managers’ body language and managers’ linguistic style or tone. In addition to this anecdotal evidence, we reviewed several conference call transcripts and found that firms disclosed specific pieces of information during conference calls that was not contained in the respective earnings announcements.
Your work did not show a decrease in dispersion when one might have expected greater convergence of analyst views following shared participation in an analyst conference. What might explain this?
Moritz Bassemir: This is an interesting point. You are suggesting that the consensus among analysts should increase after a public disclosure event such that forecast dispersion decreases. Despite being public, analyst conferences, however, may also prompt analysts to trigger new private information that is not shared with other analysts. During a conference call, each analyst is typically only allowed to ask a few questions. Therefore, the analysts can be expected to seek out pieces of information that are missing in their own information set. And although the answer to conference call questions will be heard by all analysts, the asking analyst may uniquely complement his or her information set and develop private information relative to other analysts. Our analysis suggests that, on average, analysts develop new private information in conjunction with the call. This in turn increases information asymmetry among analysts and does not lead to a decrease in forecast dispersion.
You say that these findings are robust to a number of control variables and sensitivity tests, what did you control for?
Zoltan Novotny-Farkas: This is a good point and one we had to think about a lot. The biggest issue we had was to ensure that our results were not driven by differences in the information environment of the firms. To put it in other words, it could be that firms that host more frequent analyst conferences have generally a richer information environment. In such a case, our results might be biased in favor of finding an impact of analyst conferences on analysts’ forecasts. However, several aspects of our research design control for differences in information environments. First of all, we use changes in forecast error and dispersion instead of levels, which mitigates the effect of different information environments. Further, we include variables like size and number of analysts following in our regressions, which also capture information environment. Besides cross-sectional analyses we also employ a within-firm design where each firm serves as its own control.
Do you see any policy implications to the work?
Zoltan Novotny-Farkas: In our view there are some policy implications. In Germany, as in other European countries like the UK, Spain or Italy, there is so far no legal requirement for firms to grant open access to analyst conferences for all interested parties. And indeed, what we observed is that the vast majority of analyst conferences in Germany are conducted as “closed calls”, that is real-time access to the call is restricted to invited participants only. Since our research suggests that analyst conferences provide material information to analysts, restricting access to these events places non-invited market participants at an informational disadvantage. This conduct is not consistent with the goal of European regulators to provide a “level playing field” among investors with regard to corporate disclosures.
In the UK, there is some discussion about opening access to archived analyst research in order to level the information playing field. Is that a good idea, in your view?
Julian Pachta: In general, making analyst reports publicly available can be interesting, because it potentially makes analysts’ earnings forecasts and stock recommendations less of a black box. This may be useful, for example, to investors who use analysts’ earnings forecasts as an input for their valuation model or stock recommendations for their investment decisions.
With regard to leveling the informational playing field, however, open access to analyst reports may not be very helpful. In a situation where access to analyst conferences is restricted, merely providing access to archived analyst research still puts non-invited parties at a temporary informational disadvantage. They receive, at best, delayed information filtered through analyst reports. Rather than focus on secondary/derivative material, our research implies that it might be better for regulators to mandate open access to analyst conference calls as the primary information source.
The research paper is available for download at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1691183