Does analyst following improve informativeness of earnings? Evidence from the MENA region

Abstract

Given ineffective disclosure and governance mechanisms, are there any mechanisms that can help improve informativeness of disclosed information in the Middle East and North Africa (MENA) region? This paper aims to answer the above question by documenting the effect of analyst following on the informativeness of reported earnings. Our results show that the informativeness of reported earnings, measured by earnings-return relation, is a significantly positively function of analyst following. We argue that analysts reduce information asymmetries by continually gathering, interpreting and disseminating firm-specific information. As a result, it becomes hard for insiders to evade effective disclosure of firm value. It, therefore, leads firms to disclose the information more truthfully, thereby improving credibility of reported earnings. We also show that our results hold across sub-samples of well-performing and badly performing firms. Interestingly, our results do not hold for firm headquartered in the Middle East.