IDEAS home Printed from https://ideas.repec.org/a/kap/rqfnac/v57y2021i3d10.1007_s11156-021-00963-8.html
   My bibliography  Save this article

Can sell-side analysts’ experience, expertise and qualifications help mitigate the adverse effects of accounting reporting complexity?

Author

Listed:
  • Rani Hoitash

    (Bentley University)

  • Udi Hoitash

    (Northeastern University)

  • Ari Yezegel

    (Bentley University)

Abstract

We examine the relation between accounting reporting complexity and analysts’ performance and whether analysts’ qualifications, experience, and expertise in specific financial domains help them more effectively process complex information. We document an inverse relation between complexity and analysts’ performance. Further, we show that analysts’ firm-specific experience, industry focus, and CFA certification alleviate some of the adverse effects of complexity, whereas analysts’ general experience does not appear to do so. Using an XBRL-based approach, we also develop new measures of analysts’ expertise and find that expertise in the areas of fair value, derivatives and pension are more valuable than other analyst characteristics in attenuating the negative effects of complexity arising from transactions and events in these areas. Overall, this study underscores the importance of analyst characteristics and the need to simplify the complex disclosures in the notes to the financial statements.

Suggested Citation

  • Rani Hoitash & Udi Hoitash & Ari Yezegel, 2021. "Can sell-side analysts’ experience, expertise and qualifications help mitigate the adverse effects of accounting reporting complexity?," Review of Quantitative Finance and Accounting, Springer, vol. 57(3), pages 859-897, October.
    • Handle: RePEc:kap:rqfnac:v:57:y:2021:i:3:d:10.1007_s11156-021-00963-8
    DOI: 10.1007/s11156-021-00963-8
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s11156-021-00963-8
    File Function: Abstract
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1007/s11156-021-00963-8?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Richard H. Thaler & Shlomo Benartzi, 2004. "Save More Tomorrow (TM): Using Behavioral Economics to Increase Employee Saving," Journal of Political Economy, University of Chicago Press, vol. 112(S1), pages 164-187, February.
    2. Edward J. Riedl & Suraj Srinivasan, 2010. "Signaling Firm Performance Through Financial Statement Presentation: An Analysis Using Special Items," Contemporary Accounting Research, John Wiley & Sons, vol. 27(1), pages 8-8, March.
    3. Ole‐Kristian Hope, 2003. "Disclosure Practices, Enforcement of Accounting Standards, and Analysts' Forecast Accuracy: An International Study," Journal of Accounting Research, Wiley Blackwell, vol. 41(2), pages 235-272, May.
    4. Feng Gu & Weimin Wang, 2005. "Intangible Assets, Information Complexity, and Analysts' Earnings Forecasts," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 32(9-10), pages 1673-1702.
    5. Shuping Chen & Bin Miao & Terry Shevlin, 2015. "A New Measure of Disclosure Quality: The Level of Disaggregation of Accounting Data in Annual Reports," Journal of Accounting Research, Wiley Blackwell, vol. 53(5), pages 1017-1054, December.
    6. Roychowdhury, Sugata, 2006. "Earnings management through real activities manipulation," Journal of Accounting and Economics, Elsevier, vol. 42(3), pages 335-370, December.
    7. Tim Loughran & Bill Mcdonald, 2014. "Measuring Readability in Financial Disclosures," Journal of Finance, American Finance Association, vol. 69(4), pages 1643-1671, August.
    8. Chychyla, Roman & Leone, Andrew J. & Minutti-Meza, Miguel, 2019. "Complexity of financial reporting standards and accounting expertise," Journal of Accounting and Economics, Elsevier, vol. 67(1), pages 226-253.
    9. Kadan, Ohad & Madureira, Leonardo & Wang, Rong & Zach, Tzachi, 2012. "Analysts' industry expertise," Journal of Accounting and Economics, Elsevier, vol. 54(2), pages 95-120.
    10. Chandra Kanodia & Haresh Sapra, 2016. "A Real Effects Perspective to Accounting Measurement and Disclosure: Implications and Insights for Future Research," Journal of Accounting Research, Wiley Blackwell, vol. 54(2), pages 623-676, May.
    11. Edward J. Riedl & Suraj Srinivasan, 2010. "Signaling Firm Performance Through Financial Statement Presentation: An Analysis Using Special Items," Contemporary Accounting Research, John Wiley & Sons, vol. 27(1), pages 289-332, March.
    12. Obrien, Pc & Bhushan, R, 1990. "Analyst Following And Institutional Ownership," Journal of Accounting Research, Wiley Blackwell, vol. 28, pages 55-76.
    13. Shana M. Clor‐Proell & Laureen A. Maines, 2014. "The Impact of Recognition Versus Disclosure on Financial Information: A Preparer's Perspective," Journal of Accounting Research, Wiley Blackwell, vol. 52(3), pages 671-701, June.
    14. Fama, Eugene F. & French, Kenneth R., 1997. "Industry costs of equity," Journal of Financial Economics, Elsevier, vol. 43(2), pages 153-193, February.
    15. K. J. Arrow, 1971. "The Economic Implications of Learning by Doing," Palgrave Macmillan Books, in: F. H. Hahn (ed.), Readings in the Theory of Growth, chapter 11, pages 131-149, Palgrave Macmillan.
    16. Frankel, Richard & Kothari, S.P. & Weber, Joseph, 2006. "Determinants of the informativeness of analyst research," Journal of Accounting and Economics, Elsevier, vol. 41(1-2), pages 29-54, April.
    17. Clement, Michael B., 1999. "Analyst forecast accuracy: Do ability, resources, and portfolio complexity matter?," Journal of Accounting and Economics, Elsevier, vol. 27(3), pages 285-303, July.
    18. Jayne M. Godfrey & Jane Hamilton, 2005. "The Impact of R&D Intensity on Demand for Specialist Auditor Services," Contemporary Accounting Research, John Wiley & Sons, vol. 22(1), pages 55-93, March.
    19. Rubin, Amir & Segal, Benjamin & Segal, Dan, 2017. "The Interpretation of Unanticipated News Arrival and Analysts’ Skill," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 52(4), pages 1491-1518, August.
    20. Haislip, Jacob Z. & Peters, Gary F. & Richardson, Vernon J., 2016. "The effect of auditor IT expertise on internal controls," International Journal of Accounting Information Systems, Elsevier, vol. 20(C), pages 1-15.
    21. Chang, Hye Sun & Donohoe, Michael & Sougiannis, Theodore, 2016. "Do analysts understand the economic and reporting complexities of derivatives?," Journal of Accounting and Economics, Elsevier, vol. 61(2), pages 584-604.
    22. Mikhail, MB & Walther, BR & Willis, RH, 1997. "Do security analysts improve their performance with experience?," Journal of Accounting Research, Wiley Blackwell, vol. 35, pages 131-157.
    23. Bhushan, Ravi, 1989. "Firm characteristics and analyst following," Journal of Accounting and Economics, Elsevier, vol. 11(2-3), pages 255-274, July.
    24. Li, Feng, 2008. "Annual report readability, current earnings, and earnings persistence," Journal of Accounting and Economics, Elsevier, vol. 45(2-3), pages 221-247, August.
    25. Zahn Bozanic & Maya Thevenot, 2015. "Qualitative Disclosure and Changes in Sell†Side Financial Analysts' Information Environment," Contemporary Accounting Research, John Wiley & Sons, vol. 32(4), pages 1595-1616, December.
    26. Guay, Wayne & Samuels, Delphine & Taylor, Daniel, 2016. "Guiding through the Fog: Financial statement complexity and voluntary disclosure," Journal of Accounting and Economics, Elsevier, vol. 62(2), pages 234-269.
    27. Hirst, DE & Hopkins, PE, 1998. "Comprehensive income reporting and analysts' valuation judgments," Journal of Accounting Research, Wiley Blackwell, vol. 36, pages 47-75.
    28. Mary E. Barth & Ron Kasznik & Maureen F. McNichols, 2001. "Analyst Coverage and Intangible Assets," Journal of Accounting Research, Wiley Blackwell, vol. 39(1), pages 1-34, June.
    29. Daniel Bradley & Sinan Gokkaya & Xi Liu, 2017. "Before an Analyst Becomes an Analyst: Does Industry Experience Matter?," Journal of Finance, American Finance Association, vol. 72(2), pages 751-792, April.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Blankespoor, Elizabeth & deHaan, Ed & Marinovic, Iván, 2020. "Disclosure processing costs, investors’ information choice, and equity market outcomes: A review," Journal of Accounting and Economics, Elsevier, vol. 70(2).
    2. Chen, Chen & Hanlon, Dean & Khedmati, Mehdi & Wake, James, 2023. "Annual report readability and equity mispricing," Journal of Contemporary Accounting and Economics, Elsevier, vol. 19(3).
    3. Joost Impink & Mari Paananen & Annelies Renders, 2022. "Regulation‐induced Disclosures: Evidence of Information Overload?," Abacus, Accounting Foundation, University of Sydney, vol. 58(3), pages 432-478, September.
    4. Kim, Hyun-Dong & Park, Kwangwoo & Song, Kyojik Roy, 2021. "Organization capital and analysts’ forecasts," International Review of Economics & Finance, Elsevier, vol. 71(C), pages 762-778.
    5. Xiaomeng Chen & Sue Wright & Hai Wu, 2018. "Exploration intensity, analysts’ private information development and their forecast performance," Accounting and Business Research, Taylor & Francis Journals, vol. 48(1), pages 77-107, January.
    6. Sean Cleary & Jonathan Jona & Gladys Lee & Joshua Shemesh, 2020. "Underlying risk preferences and analyst risk‐taking behavior," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 47(7-8), pages 949-981, July.
    7. Ramnath, Sundaresh & Rock, Steve & Shane, Philip, 2008. "The financial analyst forecasting literature: A taxonomy with suggestions for further research," International Journal of Forecasting, Elsevier, vol. 24(1), pages 34-75.
    8. Boone, Jeff P. & Khurana, Inder K. & Raman, K.K., 2022. "Accounting estimation intensity, analyst following, and earnings forecast properties," Advances in accounting, Elsevier, vol. 59(C).
    9. Beyer, Anne & Cohen, Daniel A. & Lys, Thomas Z. & Walther, Beverly R., 2010. "The financial reporting environment: Review of the recent literature," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 296-343, December.
    10. Hueiling Chen & Cheng-Tsu Huang & Hsiou-Wei W. Lin, 2016. "Changes in analyst following for less covered firms accompanying Regulation Fair Disclosure: the roles of ability and industry experience," Review of Quantitative Finance and Accounting, Springer, vol. 46(3), pages 519-541, April.
    11. Gus De Franco & S.P. Kothari & Rodrigo S. Verdi, 2011. "The Benefits of Financial Statement Comparability," Journal of Accounting Research, Wiley Blackwell, vol. 49(4), pages 895-931, September.
    12. Elizabeth Blankespoor, 2019. "The Impact of Information Processing Costs on Firm Disclosure Choice: Evidence from the XBRL Mandate," Journal of Accounting Research, Wiley Blackwell, vol. 57(4), pages 919-967, September.
    13. Tsao, Shou-Min & Lu, Hsueh-Tien & Keung, Edmund C., 2016. "Voluntary monthly earnings disclosures and analyst behavior," Journal of Banking & Finance, Elsevier, vol. 71(C), pages 37-49.
    14. Cui, Huijie & Liang, Shangkun & Xu, Canyu & Junli, Yu, 2024. "Robots and analyst forecast precision: Evidence from Chinese manufacturing," International Review of Financial Analysis, Elsevier, vol. 94(C).
    15. Brian J. Bushee & Ian D. Gow & Daniel J. Taylor, 2018. "Linguistic Complexity in Firm Disclosures: Obfuscation or Information?," Journal of Accounting Research, Wiley Blackwell, vol. 56(1), pages 85-121, March.
    16. Tsang, Albert & Xiang, Yi & Yu, Li, 2023. "Cross-border regulatory cooperation and analyst forecasts," International Review of Financial Analysis, Elsevier, vol. 90(C).
    17. He, Guanming & Li, April Zhichao, 2024. "Does media coverage of firms' environment, social, and governance (ESG) incidents affect analyst coverage and forecasts? A risk perspective," International Review of Financial Analysis, Elsevier, vol. 94(C).
    18. Guragai, Binod & Attachot, Weerapat & Peabody, S. Drew, 2020. "Financial statement presentation of discontinued operations: Determinants and consequences," Advances in accounting, Elsevier, vol. 49(C).
    19. Joel A. C. Baum & Anne Bowers & Partha Mohanram, 2016. "Mutual Forbearance and Competition Among Security Analysts," Management Science, INFORMS, vol. 62(6), pages 1610-1631, June.
    20. Lobo, Gerald J. & Song, Minsup & Stanford, Mary, 2012. "Accruals quality and analyst coverage," Journal of Banking & Finance, Elsevier, vol. 36(2), pages 497-508.

    More about this item

    Keywords

    XBRL; Complexity; Financial analysts’ performance; Financial analysts’ expertise; Recognition versus disclosure;
    All these keywords.

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G29 - Financial Economics - - Financial Institutions and Services - - - Other
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:rqfnac:v:57:y:2021:i:3:d:10.1007_s11156-021-00963-8. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.