Corporate organizational structure, tax havens and analyst forecast properties

This study investigates how corporate organizational complexity affects analyst forecast behavior and the information environment of the firm. Using a unique sample of publicly traded Taiwan companies which are required to disclose information on all of their affiliates, we capture the feature of organizational complexity by measuring the number of investment layers connecting the parent firm and the lowest-tiered subsidiary. We argue that long chains of investment layers, which are associated with higher information asymmetry and agency costs, are likely to reduce the quality of financial reporting and complicate analysts’ forecast tasks. We find that, after controlling for other determinants of forecasting behavior, analysts experience greater difficulty in predicting the earnings of firms with more investment layers than in predicting the earnings of firms with fewer layers. In addition, we find that a long chain of investment layers influences analyst forecast accuracy and dispersion more if firms also have a larger number of investees in tax havens and if firms have a higher deviation between controlling rights and cash flow rights. Overall, we document that organizational complexity exacerbates the agency costs between investors and managers, which in turn complicates analyst forecast tasks.