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SYNOPSIS: This study assesses the information needs of sell-side financial analysts. It departs from the technical earnings-per-share (EPS) and analyst survey methods employed in previous studies and directly examines the content of a sample of 479 sell-side analyst company reports comprising over 3,500 pages of text. This sample of reports is stratified by exchange, industry, and size, across three recent time periods, and includes reports from over 40 brokerage firms. Our principal findings are that analysts: (7) base their recommendations primarily on an evaluation of company income, relative to balance sheet or cash flow evaluations; (2) disaggregate company performance into a greater number of operating units (segments) than required under Generally Accepted Accounting Principles (GAAP); (3) emphasize company core earnings, including earnings per share, and earnings variability; (4) prefer conservative earnings management that establishes or adjusts discretionary reserves, allowances, and off-balance-sheet assets; (5) give attention to earnings momentum; (6) commonly evaluate assets and liabilities on a cost, not market-value, basis; (7) develop non-GAAP cash flow schedules, including per-share calculations; and (8) extensively consider nonfinancial information, including company risks and concerns, anticipated changes, competitive position, management, and strategy. These findings have direct implications for accounting and financial reporting policy, and for future research on user information needs.
Data Availability: A list identifying the analyst reports used is available from the authors. The reports themselves are publicly available from Investext.
INTRODUCTION
Since enactment of the federal securities legislation in the 1930s, financial reporting in the United States has evolved in a regulated environment to provide greater and broader company information to sophisticated and unsophisticated equity investors and other stakeholders. While such parties obtain information from a variety of sources, traditional financial reporting provides analysts and other users with a significant part of the information platform for forecasting companies' future performance. This implies an importance for sound accounting and financial reporting policies, particularly when it is not well-established that there are sufficient market mechanisms or incentives for management to voluntarily disclose "proprietary" information to users. Such policies can increase social welfare by improving investor resource-allocation decisions, and by reducing duplicative information production costs by information intermediaries.
In 1991, concerns about financial reporting led to the formation of the American Institute of Certified Public Accountants (AICPA) Special Committee on...