Analysts to the rescue

In this study we use the SEC's decision to eliminate the reconciliation requirement for cross-listed companies to examine whether this loss of information prompted financial analysts to provide more informative research reports. We first document that the informativeness of analyst earnings forecasts increased, on average, in the post-regulation period for the sample of firms that stopped providing the reconciliation information (regulated firms). We next relate this change in informativeness to stock liquidity, a common proxy for information asymmetry. We do not find any change in market liquidity for regulated firms with greater analyst informativeness in the post-regulation period. In contrast, we document a decrease in market liquidity for regulated firms with lower analyst informativeness. These results support the conjecture that, when analysts compensate for the loss of information, the firm's information environment is not affected. We conclude that analysts can play an important role in capital markets as information providers and that their research can be especially valuable in times of information shortage.