When Do Sell-Side Analyst Reports Really Matter? Shareholder Protection, Institutional Investors and the Informativeness of Equity Research

We examine whether the informativeness of sell-side analyst reports depends on the strength of the regulatory environment of a country and the regulatory background of the institutional investors of a company. Our analyses are based on more than 600,000 analyst reports from 2005 through 2010 from eight leading capital markets (the U.S., the EU5, Switzerland and Japan).Based on both measures that we use to proxy the informativeness of analyst research (i.e., short-term market reaction and forecast errors with respect to corporate earnings and target prices), our results show that the information value of research increases as the level of investor protection increases. This result is robust to different specifications of investor protection. We further demonstrate that analyst forecasts are more (less) valuable when the majority of institutional investors are from strong (weak) investor protection countries