Corporate Strategy and Analyst Behaviour

Abstract

This dissertation investigates whether and how corporate strategy affects analyst behaviour, ranging from the coverage decision to forecasting efficiency. Both firm and industry level strategic information are important inputs to analyst reports which are useful to investors in a market where information asymmetry exists between the firms and their (potential) shareholders. In this thesis, I employ Miles and Snow’s (1978, 2003) strategy typology to identify three types of firms (or industries): those adopting an innovation-focused ‘Prospector’ strategy, those pursuing cost-efficient ‘Defender’ strategy and those adopting ‘other strategies’ (‘Analyzer’ and ‘Reactor’ strategies).

The first study in this thesis examines how firm strategy and industry strategic orientation affect the demand for analyst coverage and the task complexity analysts face if they choose to covering a firm. I find that Prospector firms receive, on average, higher analyst coverage, than Defender firms, but are less likely to be covered by expert analysts. These findings suggest that the reduced task complexity associated with Prospectors’ superior discretionary disclosure outweighs any impact of task complexity from these firms’ greater inherent uncertainty. Defenders low analyst coverage, but abnormally high coverage from experts suggests that the high task complexity from weaker disclosure dominates the low task complexity arising from Defenders’ relatively stable operations. I find similar effects for the association between industry strategic orientation and analyst coverage.

The second study investigates whether industry strategic orientation moderates the impact of firm-level strategy on the analyst coverage decision and analyst forecast accuracy. I find that firms adopting a Defender strategy in an industry with the opposite strategic orientation (Prospector-oriented industries) receive abnormally low analyst coverage, which I attribute largely to reduced value of information spillovers. I also find (weaker) evidence that firms adopting an extreme of the same nature as the industry orientation (‘Extreme Prospectors’ and ‘Extreme Defenders’) are associated with lower forecast accuracy. In Defender-oriented industries, I find evidence consistent with the potential impact on profitability of pursuing a strategy contrary to the industry orientation (i.e. a Prospector strategy) reducing both analyst coverage and forecast accuracy.

The final study investigates how firm strategy affects asymmetric cost behaviour, and in turn, whether analysts’ understanding of strategy and its association with asymmetric cost behaviour, reduces the bias in their forecasts. I find that forecast optimism is, on average, increasing in the degree of cost stickiness, suggesting analyst do not perfectly incorporate realised cost stickiness in their earnings forecasts. Saliently, I find that analyst forecast bias for firms for which cost stickiness is most predictable (Prospectors) are less sensitive to the incidence of cost stickiness than is the case for other firms, and that the opposite is true for firms for which cost stickiness is less likely to prevail (Defenders), and thus should be more of a shock to analysts.