Company-sponsored analyst research: An exploratory study of Johannesburg Stock Exchange-listed companies

Abstract

Orientation: Independent sell-side analyst research is often focused on large, listed companies. Consequently, smaller companies resort to paying analysts to publish research on their companies, hoping to improve their visibility among investors and enhance the liquidity of their shares. Research purpose: This study aims to explore the information value of company-sponsored research in the context of Johannesburg Stock Exchange (JSE)-listed firms. Motivation for the study: The JSE has a number of smaller listed companies which struggle to compete for investor attention. These companies are driving the increase in company-sponsored analyst research on the JSE. Research approach/design and method: Our analysis is based on analyst reports, financial statements and stock exchange news announcements of a sample of 30 companies. We adopt an exploratory content analysis, with descriptive statistics employed to illustrate the information value of the analyst coverage by evaluating forecast accuracy and bid-ask spreads. Main findings: Our findings show optimistic revenue projections. However, share price projections reflect a more conservative stance, with most forecasts below the actual share prices. Furthermore, the analysis produced mixed results regarding the effect of sponsored coverage on bid-ask spreads. As such, we find no conclusive, empirical evidence of the effect of sponsored coverage on market liquidity. Practical/managerial implications: Companies are increasingly paying for coverage, indicating a gap in the information environment. Given the potential for conflicts of interest, there is scope for regulation on the JSE, as demonstrated on other exchanges. Contribution/value-add: Despite the increase in sponsored coverage, there is a lacuna in related academic research. To our knowledge, this is the first study to focus on company-sponsored research in the context of the JSE