The Effect of Firms' Communication Complexity on Analyst Following and the Properties of their Earnings Forecasts
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Abstract
| This paper examines the effect of the complexity of firm written communication on the behavior of sell-side financial analysts. Using a measure of the readability of corporate annual reports we document that analyst following, effort (measured as the length of time between the annual report filing and the first analyst report), and the informativeness of their reports are positively related to firm communication complexity. Additionally, we find that communication complexity reduces forecast accuracy and increases forecast dispersion. Overall, our results are consistent with the prediction of an increasing demand for analyst services for firms with more complex annual reports and a greater collective effort by analysts for firms with less readable disclosures. Our results contribute to our understanding of the role of analysts as information intermediaries for investors, as well as to the long standing debate about the intended audience of financial information and the effect of the complexity of written financial communication on the usefulness of this information. |
| Contact information: |
| Paolo Perego |
