Does shareholder protection affect the performance of analysts as a gatekeeper?

A second reason to examine analysts’ forecasts for possible errors is that evidence of market inefficiency based on “abnormal” stock returns is always open to the criticism that the expected return benchmark used in measuring abnormal returns may be misdirected (Fama 1998). Analysts’ forecasts do not suffer from benchmark issues and thus provide a neat avenue for studying general market inefficiencies.

The Legal Enforcement measure is the mean score across three legal variables: (1) the efficiency of the judicial system, (2) an assessment of the rule of law, and (3) the corruption index. All three variables range from 0 to 10.

The dataset is fully accessible at the project “Law, Finance and Development” homepage, www.​cbr.​cam.​ac.​uk.

Ramnath et al. (2005) find, contrary to Philbrick and Ricks (1991), that actual EPS data from Value Line and the I/B/E/S are comparable, but I/B/E/S consensus forecasts are more accurate and a better proxy for the market’s earnings expectations. The superiority of I/B/E/S consensus forecasts can be traced to two attributes: (1) the ability to provide forecasts that are closer to the earnings announcement date (Value Line publishes only one forecast per quarter, while the I/B/E/S consensus is updated monthly), and (2) the ability to aggregate across forecasts from multiple analysts (Value Line forecasts are issued by a single analyst, whereas the I/B/E/S consensus is based on forecasts contributed by a number of analysts). Bradshaw (2004) uses First Call as his source for analyst data. First Call and the I/B/E/S differ in that First Call includes consensus data for a month only if the consensus was revised during the month. The I/B/E/S is more comprehensive in that it includes all months, even those with no change in the consensus.

Several firms in Sweden have both A- and B-class shares, but worth noting is that EPS is the same for both classes. Because analysts’ forecasts for Swedish firms include both A- and B-class shares, we do not control for firms with dual classes.

In Sweden it is common to have dual-class shares with different voting rights. For example, an owner of an A-class share in Ericsson has ten times more votes than an owner of a B-class share.