The use of information by financial analysts during a financial crisis

• Author: Shahed Imam,Mujahid Mohiuddin Babu,Kheng Lee Tan
• DOI: http://doi.org/10.1002/jsc.2291
• Date: 01 September 2019
• Published date: 01 September 2019

RESEARCH ARTICLE

The use of information by financial analysts during

a financial crisis

Kheng Lee Tan

1

| Shahed Imam

1

| Mujahid Mohiuddin Babu

2

1

Warwick Business School, University of

Warwick, Coventry, England, United Kingdom

2

School of Marketing and Management,

Coventry University, Coventry, England,

United Kingdom

Correspondence

Shahed Imam, Warwick Business School,

University of Warwick, Coventry, England CV4

7AL, United Kingdom.

Email: shahed.imam@wbs.ac.uk

Abstract

This study examines the relevance of information set in sell-side analysts' publicly

available reports during the recent financial crisis. Prior studies suggest that analysts

use more nonfinancial than financial information to support stock recommendations

but there is little academic research on what information is relevant to them during

periods of serious economic stress. We analyzed 90 analysts' reports from three sub-

periods (a) precrisis (2006–2007), (b) crisis (2007–2009), and (c) postcrisis

(2009–2010). Our findings suggest that during the crisis period, analysts focus more

on specific sets of information such as cost control and strength of management

whereas in the noncrisis period they focus more on information related to earnings

and market outlook. The importance of the interdependency of financial and non-

financial information is evident in their recommendation especially in crisis and post-

crisis period as we find joint use of both set of information to support their

recommendations. We conclude that although nonfinancial information may have

been used more frequently and jointly to support recommendations, it is financial

information which ultimately guides analysts' recommendations both in good times

and in bad.

1|INTRODUCTION

This study examines the type of information (financial and non-

financial) that is relevant to sell-side analysts across different eco-

nomic environments, precrisis, crisis, and postcrisis. Information is

considered relevant when it affects decision-making. It is not surpris-

ing that the relevance of information set to investors and analysts is

an important issue in accounting and finance research and in standard

setting. However, there is little direct evidence regarding what infor-

mation is actually relevant to sell-side analysts, that is, what informa-

tion affect their decision-making under financial crisis conditions.

During a crisis period, there is more uncertainty about the future

performance of companies and the market outlook than during a nor-

mal period. The phase of the financial crisis requires strategic

reformulation of the companies' plans and financial setting in order to

overcome their difficulties in the short run and meet new

opportunities of growth (Kianfar, Smith, & Milana, 2012). On the other

hand, investors are likely to be in particular need of relevant informa-

tion and expert analysis and thereby rely more on analyst research

during market downturns than in normal periods. This obviously cre-

ates a challenge to analysts to understand what information is rele-

vant during this volatile environment.

Analysts who make good use of information are likely to be valued

more by the market participants as in this period good analysis should

have the highest value. Bartram and Bodnar (2009) suggest that dur-

ing the crisis, investor confidence significantly declined and firms

experienced downward pressure on their stock prices. Likewise, Cam-

pelo, Graham, and Harvey's (2011) survey on CFOs in 39 countries

reveals that in order to reduce business risk and financial constraints,

firms reduce investments in the crisis period. Investors and companies

would therefore be interested into whether intermediaries

(i.e., analysts) can help investors to better understand the market and

company performance in a period when investors might be nervous

JEL classification codes: E44, G01, G15, G17.

DOI: 10.1002/jsc.2291

Strategic Change. 2019;28:369–379. wileyonlinelibrary.com/journal/jsc © 2019 John Wiley & Sons, Ltd. 369