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Social comparison of cost behaviour and financial analysts

Journal Contribution - Journal Article

We investigate whether social comparison of a firms reported selling, general and administrative (SG&A) expenses affects financial analysts information uncertainty (and their behaviour). Based on a sample of US firms, we examine whether similarity of a firms SG&A to an industry-specific peer-based benchmark (or social benchmark) is associated with analyst forecast dispersion, forecast error and coverage. For external observers, the SG&A relative to sales (SG&A ratio) is a key diagnostic of a firms cost behaviour, but interpretational ambiguity of the SG&A signal is likely to incentivise search for information-relevant external cues to set expectations about and assess a firms SG&A ratio. Higher similarity to the social benchmark is expected to attenuate information asymmetry between analysts and firms regarding firms ability to effectively control overheads, decreasing analyst information uncertainty about cost behaviour and performance. In line with a varying weights model for social comparison, we observe a negative association between SG&A similarity and both forecast dispersion and error of one-year-ahead earnings for firms with a prior SG&A ratio exceeding the social benchmark. Our findings also show a negative relationship between SG&A similarity and analyst coverage, especially for firms with a prior SG&A ratio exceeding the social benchmark.
Journal: Accounting and business research
ISSN: 0001-4788
Volume: 48
Pages: 805 - 839
Publication year:2018
Keywords:A1 Journal article
BOF-keylabel:yes
BOF-publication weight:1
CSS-citation score:1
Authors:International
Authors from:Higher Education
Accessibility:Open