The Role of Sell-Side Analysts after Accusations of Managerial Misconduct

Prior research calls into question the general informational role of analysts by documenting inefficiencies, biases, and limitations of sell-side analyst research (e.g., forecasts). Rather than examine the general informational value of analyst research, I examine the value of analyst research in a specific setting – shareholder lawsuits – when investors demand information but other information providers are limited in their ability to provide it. After the filing of a shareholder lawsuit, the demand for and production of management provided information decreases. I argue that analysts are uniquely qualified to provide a portion of the information demanded by investors after the filing of the lawsuit. I find evidence consistent with analysts providing more research that is more informative after the lawsuit's filing. I also find evidence that investors are more likely to demand information from analysts when the severity of the lawsuit is greater. This study provides contrasting evidence to the literature that is critical of analysts by documenting that analysts are able to produce useful information when investors demand it, despite a potential reduction in the demand for or production of management-provided information. In addition, this paper provides insights on how one facet of the firm's information environment changes after the filing of the lawsuit, which is useful in developing a more complete picture of how class action lawsuits impact the information environment