Silence is Golden: Discretionary Analyst Reporting and Stock Returns

Abstract

Classic agency theory predicts that analysts selectively provide coverage and report their expectations. This paper examines empirically if incremental investment value can be uncovered from analysts’ choice between silence and speech, measured as the level of reporting not explained by size or turnover. We find that “silence” negatively, and “speech” positively predicts future stock returns. More importantly, “speech is silver, silence is golden”, the observed price shift is mainly driven by silence, providing evidence that analysts’ inaction can impede the price discovery process. This is consistent with the claims that analysts’ expectations are based on valid information, that analyst self-selection is pervasive due to principal-agent conflicts, and that the loss of information with analyst silence has resulted in some mis-valuation which can be viewed as a form of classic agency cost.

Keywords: Analyst selective reporting, Analyst conflicts,Agency theory, Silence

JEL Classification: G14, G24