Financial restatements and sell-side analysts' stock recommendations: evidence from Malaysia

Abstract

PurposeThe purpose of this paper is to examine the influence of financial restatements on the sell-side analysts' stock recommendations.Design/methodology/approachThe sample of this study is based on a dataset from a panel of 246 Malaysian public listed companies for the period 2008 to 2013 (651 company-year observations). This study employs feasible generalized least squares regression.FindingsThis study finds a negative and significant relationship between restated companies and sell-side analysts' stock recommendations, which means that sell-side analysts issue less favorable stock recommendations for restated companies.Practical implicationsThe findings based on observations from an emerging economy complement the results of the US studies that analysts revise their earnings forecasts or recommendations downwards or drop coverage following financial restatements. The results of this study should be useful to capital market participants in understanding how analysts perceive and evaluate restated companies.Originality/valueThis paper expands the literature on financial restatements consequences in an emerging market which is largely unstudied. Prior research on analyst behavior towards restatements has focused on the consequences of restatements in terms of analyst following and forecast accuracy and dispersion. This study examines if and how the restatements affect the analysts' final output as reflected in the recommendation opinion, an area that has so far received little attention.

Audit Committee Chair Attributes and Audit Report Lag in an Emerging Market

“…The mean of firm size as computed by the natural log of total assets was 13.152, with the minimum and maximum sizes of 9.880 and 17.675, respectively. This result is consistent with findings of empirical studies (e.g., Al-Absy, Ismail, & Chandren, 2018;Qasem, Aripin, & Wan-Hussin, 2020). In terms of leverage, the descriptive statistics indicated a mean of 0.194, with a minimum value of zero and a maximum value of 0.724.…”

Institutional investor heterogeneity and analyst recommendation: Malaysian evidence

“…Following previous studies on analysts' outputs (Autore et al, 2009;Han et al, 2014;Ioannou & Serafeim, 2015;Jegadeesh et al, 2004;Liu, 2016Liu, , 2017Qasem et al, 2020), this study includes several control variables, namely managerial ownership (MOWN), board size (BSIZE), board independence (BINDP), company size (LNSIZE), leverage (LEVGE), book to market ratio (BTM), company profitability (ROA), company return (RETURN), earning to price ratio (EP), and company age (AGE). The rationales for their inclusion are provided below.…”

“…Third, we add to the sparse literature of analyst behaviour in emerging markets. A few Malaysian studies have examined the relationship between corporate governance, culture, political patronage and analysts' forecast errors (Abdul Wahab et al, 2018, 2015, association between institutional ownership, political connections and analyst following (How et al, 2014), and the influence of financial restatements on the sell-side analysts' stock recommendations (Qasem et al, 2020). None has examined the relationship between types of institutional investor ownership and analyst stock recommendation, which makes our study unique.…”

“…The study makes the following contributions. First, most studies that examine the determinants of analysts' stock recommendations have considered various firm-specific factors such as corporate governance strength (Papangkorn et al, 2020;Yu, 2011), corporate social responsibility initiatives (Alazzani et al, 2021;García-Sánchez et al, 2020;Ioannou & Serafeim, 2015;Wan-Hussin et al, 2021), earnings growth and risk (Peasnell et al, 2018), shareholder rights (Autore et al, 2009), equity incentive plans (Liu, 2017), financial restatements (Qasem et al, 2020) and degree of internationalisation (Luo & Zheng, 2018). Our study extends the literature by examining the relationship between institutional investor heterogeneity and sell-side analyst stock recommendation, an area that has so far received little attention.…”

Family businesses restrict accrual and real earnings management: Case study in Saudi Arabia

“…However, the data suffer from heteroscedasticity, but not from autocorrelation. Thus, this study adopted the Feasible Generalised Least Squares (FGLS) estimator because it provides more accurate estimates when heteroscedasticity is present (Alonso et al, 2017;Qasem et al, 2020;Sakawa & Watanabel, 2018;Wooldridge, 2010). To determine the robustness of the results, pooled OLS regression, GLS random-effects regression and Panel-Corrected Standard Errors (PCSE) regression were used, giving somewhat weaker but largely similar results.…”