PROCESOS DE PLANIFICACIÓN CURRICULAR

Decision

To attempt to distinguish the impacts of corporate strategy on the analyst coverage decision, I use variation in analyst expertise to generate predictions regarding the relative impacts of task complexity derived from ex ante information asymmetry and discretionary disclosure. Prior analyst literature has identified a number of analyst attributes that can be used as an indicator of analyst expertise (e.g. general experience, firm-specific experience and the number of firms an analyst follows), and these attributes affect analysts’ ability to deal with task complexity. I focus on the analysts general experience, measured by the number of years of forecasting experience, as prior literature

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suggests that this can influence the analysts’ ability to deal with task complexity (Clement 1999, Clement and Tse 2003, 2005, Kim et al. 2011, Drake and Myers 2011 and Casey 2013) and, in turn, their coverage decision (e.g. Clement 1999 and Drake Myers 2011).12

3.1.1.1. Corporate Strategy and Expert Coverage

As previously discussed, corporate strategy affects the analyst coverage decision through two channels: 1) the level of ex ante information asymmetry and 2) the frequency of discretionary disclosure, and there are competing ‘demand’ and ‘supply’ effects associated with each of the broader impacts. Prior literature suggests that analysts’ general experience increases their ability to cope with more complex tasks by developing better analytical skills and relationships with management (e.g. Clement 1999), while having no logical impact on the level of ex ante information asymmetry that investors in a firm faces. Therefore, observing the differences in analyst following between experienced and junior analysts may help to disentangle the two impacts and infer which impact dominates the ultimate impacts of corporate strategy on analysts’ decision to follow a firm.

Before discussing how analyst experience may help disentangle the two strategic impacts, I briefly discuss prior literature examining analysts’ motivation to cover firms with high task complexity. Intuitively, analysts’ motivation to take on a more difficult task should be the reward of higher compensation. However, prior literature on forecast accuracy documents inconclusive results with regards to the relationship between analyst compensation and task difficulty. Mikhail et al. (1999), Hong et al. (2000) and Hong and Kubik (2003) find analyst forecast accuracy is associated with analyst job turnover and career prospects that are linked to compensation. A more recent study by Groysberg et al.

12 _{Most of the other proxies for expertise identified in the literature are either not suitable for use in}

explaining the decision to cover an individual firm or, in the case of broker size, are correlated with investment banking incentives (which I test separately in my additional analysis). Even though firm-specific experience is a strong indicator of analyst expertise, it can only exist after analyst starts to cover the firm. The number of firms and industries covered by an analyst are endogenous to the coverage decision.

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(2011) focussing on high-status investment banks suggests that analyst forecast accuracy is not a determinant of analysts’ upward career prospects, but does influence the possibility of being terminated (analyst turnover). This means analysts will not get higher compensation by simply providing accurate forecasts. However, it is possible that the reward associated with have high quality forecasts are already captured in the coverage decision. Experienced analysts may be rewarded for performing more difficult tasks when they first choose to follow the firms. In summary, experienced analysts should be more likely to follow firms with high task complexity than junior analysts.

Based on the arguments in Section 3.1.1.3, Prospectors are expected to be associated with higher cost of supply due to their greater ex ante information asymmetry channel, but lower cost of supply arising from their more frequent discretionary disclosures. Therefore, if there is any net impact of task complexity on Prospector coverage, it should be predictably associated with the expertise of the analysts providing that coverage, because experienced analysts possess greater skills in dealing with less precise information (Clement 1999), So, if the higher task complexity arising from greater information asymmetry dominates any reduction in complexity arising from better disclosure, Prospectors should be covered by relatively expert analysts, as perH2FPe and H2IPe: H2FPe: The likelihood that an analyst covers a Prospector is increasing in their

experience.

H2IPe: The likelihood that an analyst covers a firm in a Prospector-oriented industry is

increasing in their experience.

Conversely, if the reduction in task complexity associated with Prospectors’ superior disclosure dominates their higher task complexity arising from inherent information asymmetry, the opposite should be true, as per H2FPeALT and H2IPALT:

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H2FPeALT: The likelihood that an analyst covers a Prospector is decreasing in their

experience.

H2IPeALT: The likelihood that an analyst covers a firm in a Prospector-oriented industry

is decreasing in their experience.

The likely strategic impacts of voluntary disclosure and inherent information asymmetry are of opposite directions for Defenders relative to the case for Prospectors. Defenders are associated with low inherent information asymmetry which leads to low task complexity, however their relatively poor disclosure environment implies relatively high task complexity (Bentley-Goode et al. 2017). Thus, if any net effect of task complexity on the coverage of Defenders is dominated by these firms poor disclosure environment, one would expect that Defenders would be covered by relatively expert analysts, as per H2FDe and H2FPe:

H2FDe: The likelihood that an analyst covers a Defender is increasing in their experience.

H2IDe: The likelihood that an analyst covers a firm in a Defender-oriented industry is

increasing in their experience.

Conversely, if the lower task complexity associated with lower inherent information asymmetry dominates the effects of weak disclosure, Defenders would be followed by relatively inexpert analysts, as per the alternate hypotheses below:

H2FDeALT: The likelihood that an analyst covers a Defender is decreasing in their

experience.

H2IDeALT: The likelihood that an analyst covers a firm in a Defender-oriented industry is

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