Equity Method Investments and Sell-Side Analysts’ Information Environment

Posted: 13 Sep 2013 Last revised: 14 Mar 2014

See all articles by Sam (Sunghan) Lee

Sam (Sunghan) Lee

Iowa State University; Iowa State University - Department of Accounting and Finance

Shail Pandit

University of Illinois at Chicago

Richard H. Willis

Vanderbilt University - Accounting

Date Written: March 1, 2013

Abstract

We study the joint effects of intercompany investing and reporting of equity method investments on the accuracy and dispersion of analysts’ annual earnings-per-share (EPS) forecasts. We compare firm-year observations with and without equity method investments. We posit two non-mutually exclusive explanations for how equity method investments may affect analyst forecast properties. The Opacity Effect posits that the condensed equity method disclosures increase information asymmetry, increasing analysts’ forecast errors and forecast dispersion. The Diversification Effect suggests that the diversification of the investor and its investee earnings streams enhances earnings predictability, decreasing analysts’ forecast errors and forecast dispersion. Our findings are consistent with both effects operating in the analyst forecasting task. Additional analyses are consistent with the Opacity Effect dominating. This occurrence results, on net, in less accurate and more dispersed forecasts for firm-years with equity method investments.

Keywords: Security analysts; Equity method investments, Forecast accuracy, Forecast dispersion, Information environment

JEL Classification: G14, M41

Suggested Citation

Lee, Sam (Sunghan) and Pandit, Shailendra and Willis, Richard H., Equity Method Investments and Sell-Side Analysts’ Information Environment (March 1, 2013). Accounting Review, November 2013, Vol. 88, No. 6, pp. 2089-2115, Vanderbilt Owen Graduate School of Management Research Paper No. 2324455, Available at SSRN: https://ssrn.com/abstract=2324455

Sam (Sunghan) Lee

Iowa State University ( email )

Gerdin Building 3323
Ames, IA 50010
United States

Iowa State University - Department of Accounting and Finance ( email )

College of Business
Ames, IA 50011-2063
United States

Shailendra Pandit

University of Illinois at Chicago ( email )

601 South Morgan Street
University Hall, Room 2303
Chicago, IL 60607
United States
(312) 355-1331 (Phone)
(312) 996-4520 (Fax)

HOME PAGE: http://business.uic.edu/faculty/shailendra-shail-pandit

Richard H. Willis (Contact Author)

Vanderbilt University - Accounting ( email )

Nashville, TN 37203
United States
615-343-1050 (Phone)
615-343-7177 (Fax)

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