Summary
This paper aims to research the context within which sell-side financial analysts make decisions to use corporate non-financial information. Prior research has demonstrated that financial analysts take into account non-financial information in their analyses of firms, but knowledge is scarce about what determines their use of this information. Based on a survey conducted among Belgian financial analysts, we observe a significant negative association between the financial analysts' use of non-financial information and the earnings informativeness of a firm's financial statement information proxied by leverage and stock return volatility. We also find that a higher amount of non-financial information is used by less experienced financial analysts and by financial analysts covering a higher number of firms.
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Extract
Determinants of Sell-Side Financial Analysts' Use of Non-Financial Information
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1. IntroductionThe quality, relevance and timeliness of corporate information are important issues in the efficient functioning of capital markets. A critical element in this respect is an efficient flow of information among capital market participants as firms, investors or financial analysts (Barker, 1998; Holland and Johanson, 2003). Traditionally, financial statement information has been useful in assessing firms. However, current trends, such as globalisation, the introduction of new technologies and new businesses, and the transition towards a knowledge economy, decrease the value relevance of financial statement information. Financial analysts and investors have been observed to rely on information beyond the financial statements (i.e. non-financial information) to judge firm value (Amir and Lev, 1996; Ittner and Larcker, 1998; Lev and Zarowin, 1999; Graham et al., 2002; Liang and Yao, 2005).Our paper investigates the behaviour of financial analysts in their use of non-financial information. Financial analysts are primary users of corporate information (Schipper, 1991), and are representatives of the investment community for which the reporting of corporate information is primarily intended (IASB, 2005). Prior research has shown that investors rely strongly on financial analysts' earnings forecasts, recommendations and reported information (Hirst et al., 1995; Ackert et al., 1996; Womack, 1996).We examine in detail the drivers of the financial analysts' use of non-financial information and propose that the usage of such information increases with a decrease in the information content of the firm's earnings, proxied by firm leverage and stock return volatility. This proposition is consistent with the two most important functions of financial analysts: releasing information to investors and monitoring firm management (Chen et al., 2002). The importance of both functions is increasing with a decrease in the earnings informativeness. We further propose that the financial analysts' use of non-financial information is associat...See the full content of this document
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