Abstract
Orientation: Independent sell-side analyst research is often focused on large, listed companies. Consequently, smaller companies resort to paying analysts to publish research on their companies, hoping to improve their visibility among investors and enhance the liquidity of their shares.
Research purpose: This study aims to explore the information value of company-sponsored research in the context of Johannesburg Stock Exchange (JSE)-listed firms.
Motivation for the study: The JSE has a number of smaller listed companies which struggle to compete for investor attention. These companies are driving the increase in company-sponsored analyst research on the JSE.
Research approach/design and method: Our analysis is based on analyst reports, financial statements and stock exchange news announcements of a sample of 30 companies. We adopt an exploratory content analysis, with descriptive statistics employed to illustrate the information value of the analyst coverage by evaluating forecast accuracy and bid-ask spreads.
Main findings: Our findings show optimistic revenue projections. However, share price projections reflect a more conservative stance, with most forecasts below the actual share prices. Furthermore, the analysis produced mixed results regarding the effect of sponsored coverage on bid-ask spreads. As such, we find no conclusive, empirical evidence of the effect of sponsored coverage on market liquidity.
Practical/managerial implications: Companies are increasingly paying for coverage, indicating a gap in the information environment. Given the potential for conflicts of interest, there is scope for regulation on the JSE, as demonstrated on other exchanges.
Contribution/value-add: Despite the increase in sponsored coverage, there is a lacuna in related academic research. To our knowledge, this is the first study to focus on company-sponsored research in the context of the JSE.
Keywords: sponsored analyst research; information environment; equity analyst; JSE-listed; conflicts of interest.
Introduction
Equity analysts are considered essential information intermediaries in the financial markets as they improve the information environment of the firm (Asquith, Mikhail & Au 2005). Often employed by financial institutions, sell-side equity analysts (Cheng, Liu & Qian 2009) are typically independent of the companies they cover. They conduct research and provide investment recommendations to potential retail and institutional investors.
On the Johannesburg Stock Exchange (JSE), independent sell-side analysts tend to focus on larger companies, as these stocks are more likely to attract investor attention and are more liquid. Smaller companies, however, often do not generate sufficient investor interest and have only limited analyst coverage (McKane & Britten 2018). This is because sell-side analysts tend to focus on larger companies, with higher trading volumes, where sufficient brokerage commissions can be generated to justify continued coverage (Hettler, Skomra & Forst 2023). As a result, smaller, thinly traded firms, which are most likely to benefit from improved information environments are less likely to attract analyst coverage precisely because of their lack of visibility and poorer information environments. Hettler et al. (2023) explain that while it makes economic sense to reduce or discontinue coverage of smaller firms because of lower demand for their research, it is these firms from which market participants can derive the most benefit from analysts’ coverage given their weak information environments.
This issue is exacerbated by the recent loss of analyst coverage for companies in general, as investors prefer Exchange-Traded Funds, which offer the benefits of diversification in an easily accessible format (Hettler et al. 2023). The reduction in independent analyst coverage is particularly problematic for smaller JSE-listed companies, which struggle to attract investor attention.
To fill the information gap left by independent analysts, smaller JSE-listed companies commission analysts to cover their companies (also referred to as ‘sponsor’ or ‘pay’ the analyst for ‘coverage’ or ‘research’). As coverage of smaller JSE-listed companies becomes increasingly uneconomical by independent analysts, company-sponsored analyst research is an increasing trend (Sebastian 2024). Despite this trend in the equity capital markets, the academic research has focused largely on forecast accuracy and the recommendations of independent analysts.
Academic focus on sponsored research in the South African capital market is further justified by the global advances in regulations and research policies surrounding such commissioned coverage. When research is paid for by the subject company, conflicts of interest will naturally arise. However, research firms have tried to manage this conflict by instituting policies that restrict the analyst or the firm itself from holding and trading client shares. Research on the Singapore Stock Exchange (SGX) proffers a potential solution to the issues of declining analyst coverage, while maintaining the level of independence of the analyst. Markov and Tan (2014) provide an evaluation of the intermediated model of research, pioneered by the SGX and the Monetary Authority of Singapore. The scheme was launched in 2004 and has a strong participation rate among SGX-listed firms. The findings suggest that the intermediated model is a viable alternative to a traditional sell-side research model and the sponsored research model, if adequately monitored and regulated. There is therefore potential for academic research to inform potential regulations by the JSE regarding sponsored research.
Despite the growing presence of company-sponsored analyst coverage, there is limited empirical evidence on its contribution to the information environment, particularly in emerging markets such as South Africa.
Therefore, the purpose of this exploratory study is to examine whether company-sponsored research contributes decision-useful information to capital markets in the context of the JSE. Specifically, the study evaluates the market relevance of such coverage by examining forecast accuracy, the relationship with market liquidity (approximated by bid-ask spread), the incremental information content of the reports and the potential influence of conflicts of interest. Given the exploratory orientation of the study, the research objective is deliberately broad to accommodate potentially unexpected trends and patterns.
Our findings suggest that analysts simplify information contained in the financial statements by emphasising key financial metrics, considered most relevant for investors. In doing so, the analysts fill an information gap by incorporating market and valuation information that is not directly provided in the financial statements. Our evaluation of forecast accuracy indicated a tendency towards optimism in revenue projections, while expense forecasts were more conservative. The results do not provide evidence of systematic upward bias in share price forecasts that could arise from conflicts of interest. In addition, the comparison of bid-ask spreads suggests that company-sponsored analyst coverage does not consistently translate to improved market liquidity.
By foregrounding the potential informational benefits and the limitations of sponsored coverage, this study contributes to discussions on corporate communication and market integrity. These findings are therefore relevant to market regulators, investors and management teams considering whether to pay for analyst coverage.
Literature review
Company-sponsored analyst reports have emerged as a response to the growing need for improved communication between investors and company management, particularly for firms with limited analyst coverage (Gao, Shivakumar & Sidhu 2018; Kirk 2011). These reports bridge the information gap that exists because of the complexity and potential limitations of financial statements, which may not provide sufficient or clear details for investors to make informed decisions.
Seminal work on information asymmetry (Akerlof 1970) focuses on the disparity in information between participants in the market. This information gap can lead to inefficiencies in capital markets if investors are unable to reliably estimate firm value. In this context, analysts serve as information intermediaries (Asquith et al. 2005; Healy & Palepu 2001) who reduce the imbalance of information by analysing financial statements, incorporating market information and producing reports that assist investors in forming expectations about firm performance. However, the potential conflicts of interest inherent in company-sponsored coverage are highlighted in agency theory (Jensen & Meckling 1976). Analysts are compensated by the firms they evaluate, creating incentives that may influence the tone of their reports or recommendations. Despite these potential conflicts, sponsored research is increasing among JSE-listed firms (Sebastian 2024).
Signalling theory (Spence 1976) proffers an additional perspective on why firms pay for their own coverage. Sponsored coverage may function as a signal of transparency and confidence in the firm’s future prospects, particularly for companies that receive limited attention from independent analysts. In these situations, firms may possess favourable private information that is not fully reflected in the share price. In this case, economic agents (company management) convey private information through costly signals.
The information environment
In the equity capital market, market participants rely on financial statements to reduce information asymmetry (Healy & Palepu 2001). The financial statements are crucial for assessing the viability of companies as investments and for monitoring investment performance. The assertion of the International Accounting Standards Board (IASB) that the primary users of financial statements are investors and lenders, further underscores their significance in decision-making (IASB, 2019). Investors and creditors aim to receive a return from their investments by buying shares or providing deployable capital to companies. Considering the IAASB statement, we can then assume a key use of financial statements is for providing information to market participants to enable them to trade.
Annual financial statements are complex, sometimes exacerbating information asymmetry (Pascual-Ezama, Paredes & De Liaño 2018). The investor or creditor is unlikely to be able to bridge the gap; analysts exist to break down the gap between the financial statements and whether to invest (Lee & Lee 2024). The sceptical nature with which analysts and investors treat accrual accounting could be because of the complexity of accounting practices that exist, as they deviate further from economic value or cash flows.
For investors, the value of financial information is also determined by the extent to which they can trust the accuracy of the information (Akerlof 1970). Companies’ information environment is further shaped by the usefulness of financial statement information for decision-making. Although financial statements play a key role in reducing information asymmetry, their complexity can limit their usefulness to investors. As a result, analysts act as information intermediaries who bridge the gap between complex financial disclosures and investment decisions (Lee & Lee 2024).
Liquidity effects of analyst coverage
Financial analysts offer information that enhances a company’s information environment, particularly where information is lacking from other sources of financial information (Charitou, Karamanou & Lambertides 2019). There is potential for the information environment to be enhanced in many ways. Improved readability and more concise reporting could enable a clearer understanding of complex financial statement (Bozanic & Thevenot 2015).
The quality of information produced by analysts stems from their understanding of the subject company, their industry acumen and their close interactions with company management. Analysts combine their financial statement understanding with conversations with management to create an expectation for the target company (Lee & Manochin 2021; Yu & Zhao 2024). Bradley, Jame and Williams (2022) discovered that, among all the sources of information available to analysts, meetings with management stand out as the most crucial inputs to assessing an investment. These meetings provide unparalleled insight, guiding analysts’ decision-making process (Drachter, Kempf & Wagner 2007).
Analysts therefore have the potential to be ‘management monitors’, a term used to describe their role in directly questioning and monitoring the actions of the company’s management in meetings and earnings presentations (Chen, Xie & Zhang 2017). Further evidence of the monitoring role of analysts is presented in Ge and Kazmi (2025). During times when upward earnings management is considered common, analysts’ forecasts were found to be more value-relevant than reported earnings. These findings show that analysts may be prepared to issue forecasts that deviate from companies’ self-reported earnings if they believe that earnings management is likely.
Studies concerning the accuracy of analyst reports have been conducted in various markets. Primarily, this research has been focused on independent analysts. For the JSE, analysts’ forecasts have been shown to be optimistically incorrect, and better at predicting actual upward movements in share prices than downward movements (Ahmed & Flint 2020). In the context of the Indian emerging market, Chaudhury and Sahoo (2022) found an improvement in forecast accuracy over time. This finding is attributed to an improvement in the information environment in a market that is maturing and becoming more efficient over time.
This link to the information environment is also relevant to the New York Stock Exchange. The introduction of Fair Disclosure regulations led to an information environment that was more strictly monitored and controlled. This resulted in a reduction in independent analyst coverage because of economic feasibility and potential conflicts of interest. This effect of reduced coverage adversely affected smaller-cap firms (Billings, Buslepp & Huston 2014; Kirk 2011). In response, the Securities and Exchange Commission (SEC) advisory committee encouraged companies to engage in sponsored research to combat the reduced coverage for smaller-cap firms (SEC 2006).
The SEC, as a regulatory body, plays a crucial role in ensuring fair and transparent markets. The recommendation by the SEC in support of sponsored research combined with the strong investor regulatory environment enables analysts to provide informative reports. Robust investor protection environments in turn enable analysts’ reports to provide decision-relevant information, enhancing the information environment (Arand, Kerl & Walter 2015; Kirk 2011).
In South Africa, the financial markets are regulated by the Financial Markets Act 19 of 2012 (Financial Markets Act 2012). A key purpose of the Act is to promote fairness, efficiency and transparency in the country’s financial system. The Act does not specifically mention company-sponsored analyst research. However, these reports may fall into the definition of ‘advice’ (Financial Markets Act 2012:11), which means any recommendation, guidance or proposal of a financial nature in respect of the buying and selling of securities. Notably, this definition excludes a report that does not contain an express or implied recommendation. The Act prohibits the dissemination of misleading information that could affect share prices. These provisions are relevant to sponsored research because the provisions imply that forecasts, recommendations and commentary must not constitute misleading statements.
Analysts combine financial statement expertise, industry knowledge and direct engagement with management to produce research and forecasts relating to the subject companies (Bradley et al. 2022; Lee & Manochin 2021; Yu & Zhao 2024). However, evidence on forecast quality is mixed: JSE studies find optimism bias in analyst forecasts (Ahmed & Flint 2020), while research in emerging markets such as India suggests forecast accuracy improves as the information environment matures (Chaudhury & Sahoo 2022).
According to Copeland and Galai (1983), the bid-ask spread is closely linked to information asymmetry in financial markets. Because informed traders can exploit informational gaps in the market, exchanges risk trading at unfavourable prices and therefore widen the bid-ask spread to compensate for these expected losses. In this way, the spread functions as a protective mechanism that allows market makers to recover losses arising from trades with better-informed participants while still earning revenues from liquidity-motivated traders. As a result, wider spreads imply higher transaction costs and therefore lower liquidity (Aitken & Comerton-Forde 2003). Given these trading dynamics, the bid-ask spread is frequently used in studies as an approximation of liquidity (Le & Gregoriou 2020; Li, Mooradian & Zhang 2007). The present study follows this precedence by analysing the bid-ask spread in relation to sponsored company research.
Analyst independence and potential conflicts of interest
Johannesburg Stock Exchange-listed companies may pay for analyst research on their company when there is a lack of independent analyst coverage (Sebastian 2024). The distinction between independent analysts and analysts who produce sponsored research is an important one. In the ordinary relationship between investors, independent analysts are incentivised to facilitate trading between investors and subject companies as commissions are often based on trading volumes. Therefore, analysts are incentivised to cover companies that will attract trade via their financial institutions. The illiquidity of certain JSE-listed companies highlights their lack of attractiveness to analysts in South Africa (McKane & Britten 2018). As a result, smaller companies resort to paying for analyst research or analyst coverage of their companies. Paid coverage often results in firms being covered by only one analyst, without the market visibility that is created from a broker consensus based on multiple analyst forecasts (Merkley, Michaely & Pacelli 2017).
Despite these potential shortcomings, sponsored research is growing in popularity (Sebastian 2024; Tsang & Yoo 2025) because of the potential for improved liquidity and a lower cost of capital (Billings et al. 2014). The benefits associated with sponsored firm coverage could possibly be attributed to an increased level of disclosure surrounding the firm, reducing the information asymmetry (Akerlof 1970) and leading to a more enhanced information environment (Leuz & Verrecchia 2000). Empirical evidence of the link between liquidity, the information environment and sponsored research is provided in Kirk (2011). The study found that firms characterised by greater uncertainty and low trading volumes were more likely to pay for analyst coverage because they have the most to gain from increased information dissemination, despite being less likely to attract coverage from independent sell-side analysts. Sponsored coverage therefore provides subject firms with better capabilities to raise equity. In turn, easier access to financing arises from more information being available to market participants. In this manner, firms are able to reduce the loss in value that typically follows a reduction in analyst coverage (Gao et al. 2018).
In company-sponsored or paid for coverage arrangements, analysts are compensated by the covered companies, creating incentives that may affect the independence of their research and forecasts (Kirk 2011). Further conflicts may arise as renewal of the coverage agreement may depend on maintaining a positive relationship with the client. As a result, sponsored research may be more susceptible to bias (Gao et al. 2018; Kirk 2011). For example, Gao et al. (2018) showed that sponsored analysts may provide forecasts that are less accurate than those of analysts who voluntarily follow firms, and that improvements in the firm’s information environment or market liquidity are limited.
Tsang and Yoo (2025) consider sponsored coverage as an information externality in the market. They posit that companies that pay analysts are likely to provide the analysts with better access to information to facilitate their research. Their study therefore compared the quality of analysts’ earnings forecasts for non-paying companies before and after the analysts initiated paid research engagements with paying companies. The results indicate that paid analysts’ earnings forecasts for non-paying firms in the same industry as their paying clients became more accurate after the initiation of paid research coverage. The authors therefore infer that access to information from paying firms may generate positive information spillovers that improve analysts’ forecasting performance for other firms within the industry.
Although research on company-sponsored analyst coverage has been conducted in the United States by Kirk (2011) and in Europe (Bessler & Stanzel 2009; Tsang & Yoo 2025), there is a gap in similar research on JSE-listed companies. This is despite the increasing trend of sponsored research and the concentration of investor attention on the larger JSE-listed companies.
Research design
The purpose of this study is to examine whether company-sponsored research contributes decision-useful information to capital markets in the context of the JSE. Specifically, the study evaluates the market relevance of such coverage by examining forecast accuracy, the relationship with market liquidity (approximated by bid-ask spread), the incremental information content of the reports and the potential influence of conflicts of interest.
Given the exploratory nature of this study, the researchers conducted a content analysis of publicly available, company-sponsored analyst reports (Krippendorff 2018). We adopted a mixed methods approach, combining qualitative content analysis with quantitative descriptive analysis. The qualitative component examines how analysts interpret and present financial statement information in company-sponsored research reports, focusing on the themes and financial metrics emphasised in the reports. The quantitative component complements this analysis by evaluating observable outcomes such as forecast accuracy and market indicators, including bid-ask spreads, to assess the potential informational and market effects of sponsored analyst coverage.
The population for this study consists of all JSE-listed firms that paid for company-sponsored analyst coverage in 2022. From this population, a purposive sample of 30 analyst reports produced by three research houses was selected. The sampling approach was guided by the availability of publicly accessible sponsored analyst reports during the study period and aimed to capture variation in reporting practices across different research providers. All companies in the sample were classified as ‘Small Cap Equity’ per the EquityRT database. Data were obtained from multiple publicly available sources, including analyst reports, company financial statements, Stock Exchange News Service (SENS) announcements and market data from EquityRT.
The phenomenon of company-sponsored analyst coverage is relatively new and expanding within the South African context. Therefore, the primary researcher aimed to utilise the most recent available year for which analysts’ forecasts could be confirmed with actual market and financial statement data. Given that analysts typically provide 12-month forecasts, the forecasts made in 2022 would pertain to the 2023 financial year, when the analysis was performed for this study. To ensure that share price data were available for analysis, the study is based on the annual financial statements and SENS announcements related to the 2022 financial year and published in 2023.
Table 1 and Table 2 provides a description of the year in which sponsored coverage started and how many companies in the sample were covered by each of the respective research houses. The researchers specifically chose research houses that focused exclusively on sponsored research and had their research available to the public. We reasoned that the clients of these were the most likely to benefit from increased visibility to all potential investors. The three research houses included in the study were purposively selected because they specialise exclusively in sponsored research and make their reports publicly available. As these providers represent the principal sources of publicly accessible sponsored analyst coverage on the JSE, their inclusion sufficiently captures the institutional setting in which sponsored research operates.
| TABLE 1: Sample of analyst reports by research firm. |
| TABLE 2: Sample of companies showing year of initiation of coverage. |
While the researchers attempted to ensure an even distribution across research houses, this was not possible because of the varying sizes and number of clients covered by each of the research houses. In the sample, each research report relates to a different company, allowing for a variety of companies and industries to be examined. Companies were included from 16 industries (detailed in Table 3).
| TABLE 3: Average length (in pages) of each information source, according to industry. |
A binary coding framework was developed to identify the presence or absence of specific financial information within the analyst reports, financial statements and SENS announcements. Each piece of information was systematically reviewed and coded such that a value of one indicated the presence of a particular metric or theme, while zero indicated its absence.
Consistent with the exploratory nature of the study, the qualitative analysis followed a two-cycle coding process as described by Saldaña (2021). In the first coding cycle, an inductive approach was adopted to identify key pieces of financial, valuation and other information provided in the reports. During this stage, the reports were read iteratively, and codes were generated directly from the reports. The initial codes were then consolidated into a set of categories. In the second coding cycle, a deductive approach was applied to re-examine the reports using the codes established in the first phase of coding. Each category was coded in binary form, where one indicated the presence of a specific piece of information and zero indicated its absence. This second cycle ensured that all relevant information identified in the initial exploratory stage was consistently captured across the sample and enhanced the transparency and reliability of the coding process (Saldaña 2021). The results of the coding process were combined with market data from the EquityRT database, to evaluate forecast accuracy and bid-ask spreads of the companies that were covered in the analyst reports.
To ensure reliability of the coding process, a subset of reports was independently coded by the researchers, and discrepancies were resolved. Given the nature of the binary coding process, discrepancies were minimal and easily resolved.
Several JSE-listed companies provide company-sponsored analyst research reports on their websites. There are also several companies that specialise in providing sponsored research. For the purposes of this study, the reports from research houses which focus on providing sponsored research were chosen. These research companies are referred to in this study as Research House A, Research House B and Research House C (Table 1 shows reports from research houses). The reports from the research houses were then filtered for analyst reports which have a year-end financial report for the 2022 financial year-end.
One way to assess whether the information being provided is sufficient for investors and creditors is by examining the bid-ask spread. In particular, the study aims to investigate whether the bid-ask spread could provide insight into whether companies with company-sponsored analysts experience a narrower bid-ask spread in comparison to companies with little or no analyst coverage. A narrower bid-ask spread for sponsored companies could suggest that analysts are helping to reduce information asymmetry and improve the overall information environment.
Data on bid-ask spreads for the sample companies were collected using EquityRT, with the bid-ask spreads for individual year-ends compared across companies with company-sponsored analyst coverage and those with minimal or no analyst coverage. To identify companies with minimal coverage, small-cap companies listed on the JSE were initially selected. These small-cap companies were then filtered to identify those with the least analyst coverage, specifically those with no analysts covering them. These companies with minimal or no coverage were used as a comparison to the sponsored coverage companies.
Ethical considerations
This study was not human or animal research and therefore determined to be suitable for an ethics waiver. The Non-Medical Ethics Review Committee of the University of the Witwatersrand issued a waiver on 21 August 2024 with reference number: WSOA-2024-07-21W.
Results
The results section presents the findings derived from the tests conducted during the research. It focuses on identifying potential information gaps within the corporate communication ecosystem, particularly in relation to the documents that comprise the information environment, such as SENS announcements, financial statements and analyst reports.
The section analyses how the analyst reports are structured and how they influence the clarity and accessibility of financial information.
Additionally, the accuracy of analyst forecasts is evaluated, alongside further analysis of spreads and auditors’ assessments. This comprehensive analysis aims to shed light on how various types of information interact within the market and how they impact decision-making processes.
The data collected for this study are driven by the research questions and the need to address specific gaps in the information environment. As the research progressed, emerging trends were identified, prompting the collection and analysis of additional data to substantiate the preliminary findings and confirm the anecdotal evidence.
Increase in sponsored research
Notably, 24 companies began paying for research in 2022, compared to only five companies in 2021. This substantial increase confirms Sebastian (2024) and reflects the growing number of firms sponsoring their own research. This trend could be an indication of the reduction of sell-side analysts in a South African context as companies seek to compensate for the declining analyst coverage on smaller stocks (Hettler et al. 2023). The reduction of sell-side analysts in a South African context could be driven by the illiquid nature of small to medium market capitalisation companies on the JSE, as analysts have been shown to focus on larger companies.
Discussion
Corporate reports and the information environment
Report length is used in this study as a comparative indicator of how information is presented across different forms of corporate communication rather than as a direct measure of informational content. The number of pages provides a consistent basis for comparing the relative volume and conciseness of information contained in analyst reports, financial statements and SENS announcements across firms and industries. Prior corporate reporting research has highlighted the importance of report length in relation to readability and the accessibility of information to users, with shorter and more concise reports often considered easier for investors to interpret (e.g. Pascual-Ezama et al. 2018). In this context, report length is used to show how analysts may be adding incremental informational value by synthesising complex financial information into more concise reports that facilitate investor understanding, rather than by simply increasing the quantity of disclosed information.
Table 3 presents the industries, the number of companies from each industry, and the corresponding number of pages for analyst reports, SENS announcements and financial statements. The number of pages and line items was averaged to calculate industry-specific averages for each report type.
As expected, the results show that the analyst reports and SENS announcements are more concise and summarised than the annual financial statements. It is also noted that the SENS announcements and analyst reports are similar in terms of page length and line items, possibly indicating that investors prefer more concise forms of communication. These more concise forms of reporting are called for by Pascual-Ezama et al. (2018) in their research, which is appropriately titled, ‘Shorter and easier is more useful: A longitudinal analysis of how financial report enforcement affects individual investors’. Their finding shows that longer, more complex financial information is not always useful in reducing the risk of incorrect investment decisions. The authors further encourage focus on key indicators that are useful irrespective of the industry.
On average, financial services companies appear to have the longest analyst reports although they do not have the longest financial statements. This possibly indicates that analysts are attempting to explain the complexities of financial service companies by providing more detail than the financial statements. A more detailed examination of the line items in the reports revealed that the longer financial statements of the Energy and Consumer sectors do not necessarily translate to greater detail in the analyst report, possibly indicating more disclosure in the financial statements than is required to make an investment decision. Overall, there is evidence that each type of report is tailored to different purposes, with possible information overload in financial statements relative to analyst reports.
The amount of information provided by annual financial statements could also be the reason for analysts not fully utilising financial statement data, as they feel the accrual accounting present within the annual financial statements could misguide valuations. An untabulated analysis of line items reported by analysts showed that only 20% of the overall items disclosed by financial statements are utilised by analysts. This could provide some clarity on how analysts feel financial statements are complex because of the number of line items reported in comparison with analysts’ reports (Lee & Lee 2024).
Given the finding that financial statements utilised the most pages to report information to users, length could be a possible reason for reduced readability of financial statements (Bozanic & Thevenot 2015). Diversity of length indicates that financial statements are not consistent regarding the length of documents provided to users in comparison to SENS and analyst reports. SENS announcements, which are official statements released by companies to the stock exchange, are shorter than annual financial statements. The diversity of pages in financial statements may be adding a level of difficulty for users by reducing the readability of financial statements (Richards & Van Staden 2015).
However, we may also interpret the findings to suggest that although analysts’ reports and SENS announcements provide valuable insights, their summarised nature may limit their ability to fully inform investors, potentially compromising their informational value (Gao et al. 2018).
Valuation and market information
The valuation and market-related information relate to information that enables not only an investor to evaluate the worth of the company on the specified exchange but also enables assessment of the target companies against other companies using exchange-related metrics.
Valuation information is closely linked to the valuation techniques used by analysts. Therefore, information that is primarily associated with these valuation techniques can be classified as valuation information. Market information, in contrast, refers to data that can only be found on an exchange and is not included in income statements or balance sheets, nor is it used in valuation techniques. Valuation information relates to inputs specifically used to determine equity valuations, which are not part of market data or found in financial statements.
The valuation and market information collected through the binary coding process were then filtered to produce Table 4, which shows all instances where valuation and market information appeared in analyst reports, SENS and financial statements. This additional analysis was conducted to assess whether the analyst reports may have incremental informational value because of the market information that they provide.
| TABLE 4: Valuation and market information. |
Financial statements and SENS announcements contain the least valuation and market-related information, depicted in Table 4. This is expected as the financial statements and SENS announcements provide historic accounting information, prepared in accordance with reporting standards. However, the prevalence of market-related information and valuation information in the analyst reports affirms prior research that shows that investors consider this type of information to be more decision-relevant (Zhang & Andrew 2014).
SENS announcements are published more frequently than annual financial statements. However, the results of our analysis show that, like the financial statements, these SENS do not contain as much valuation and market information as the analyst reports. The lack of these categories of information indicates an information gap that is not filled by financial statements or even the more frequent SENS announcements. With regards to valuation and market-related information, analysts usually provide more information in comparison to financial statements and SENS announcements, which points to their research filling an information gap.
Commentary provided in the analyst reports
The researcher also examined the commentary sections of the analyst reports, which typically provide context and explanations for the financial results. Of the 30 companies in the sample, 20 companies provided commentary.
The commentary was analysed by breaking it down into individual sentences. The researcher found the structure of commentary to be quite similar between analyst reports and financial statements. In cases where commas or other punctuation marks indicated a continuation of thought, the researcher captured the content up to the full stop to ensure consistency.
The researcher also noted some similarities in the wording used in the commentary of financial statements and analyst reports. For instance, one company in the sample referred to ‘economic challenges faced by clients, particularly the prolonged skills shortages in the nursing division’, when explaining their performance. The corresponding analyst report for this company described the performance using similar language, stating, ‘nursing shortages negatively affected the business’.
While it was initially considered that these similarities in phrasing could be coincidental, further analysis revealed that 14 out of the 20 companies providing commentary (or 70%) had similar sentences across both their financial statements and analyst reports. It is important to note that, of the 30 companies in the sample, only 20 companies provided commentary, meaning the analysis is based on this subset. Interestingly, only six of the 20 companies did not exhibit similar sentences, suggesting a potential trend. The similarities in wording could potentially support the idea that analysts might rely on management to provide insights or guidance on key performance factors. This observation tentatively aligns with existing literature, which suggests that analysts often depend on management’s explanations when formulating their reports, helping shape how investors view a target company (Bradley et al. 2022).
The findings regarding commentary might offer some tentative inferences regarding the independence of analysts. The literature suggests concerns about the independence of company-sponsored analysts arise, particularly because of potential conflicts of interest that could stem from the analyst being paid by the target company for which they are conducting research (Gao et al. 2018). Our findings suggest that analysts are echoing management sentiment in their reports, which may offer some preliminary insight into a potential conflict of interest. If analysts are relying heavily on management’s insights to form their assessments of the target company, it might imply that their analysis is less objective, and they may not be playing a monitoring role.
Potential conflicts of interest
Analyst reports were inspected to determine the extent of disclosure of potential conflicts of interest. We found differences in the disclosure according to the research house. Each of the three research houses appears to have its own policy regarding required disclosures, although all have a minimum level of information that is routinely disclosed.
The disclosures relating to conflicts of interest for Research House A clearly identify potential bias in its analysis. It states that the report is commissioned by the company being analysed, with payment received for its production. Additionally, the standard disclosure states that the analyst may hold personal positions in the company, either long or short, which could affect objectivity. This level of disclosure evidences a commitment to transparency and outlines both the financial arrangement with the research house and the analyst’s personal interests.
While not as direct as Research House A, Research House B also highlights a potential conflict of interest. It explains that the reliance on a subscription model, where subject companies contribute to funding, introduces the possibility of bias.
Research House C’s disclosure indicates a lower risk of conflicts of interest compared to research houses A and B. While the company is paid for the report, it makes clear that no payment is accepted in securities or other potentially biasing forms. Additionally, Research House C explains that they enforce strict personal dealing policies to prevent employee positions from influencing the analysis, offering a structured and transparent approach to managing conflicts.
Accuracy of analyst forecasts
To analyse the accuracy, the researcher compared the 2022 analyst forecasts for 2023 with the actual 2023 results reported in the financial statements. These results were sourced from Equity RT. The key objective of this analysis was to evaluate whether analysts’ forecasts were overly optimistic or pessimistic in relation to the actual financial performance of the sponsored companies.
The analysis focused on revenue, headline earnings per share (HEPS), profit after tax (PAT) and share price, which were compared to actual results. The direction of the forecast errors (i.e. whether analysts overestimated or underestimated the figures) may offer insights into potential biases in analysts’ forecasts. If analysts consistently overestimate certain metrics, this could indicate a tendency toward optimism, suggesting that analysts may be influenced by their relationship with the company, possibly reflecting a conflict of interest. Conversely, consistent underestimation of results might point to a more pessimistic outlook, which could also be indicative of analysts exercising caution or bias in their assessments. These findings, which assess the accuracy of analysts’ forecasts, may provide an indication of the independence or potential conflicts of interest in their analyses.
Table 5 presents the full analysis of the comparison between analysts’ forecasts and actual results.
The results show that most analysts forecast with an upward error for revenue. This aligns with Ahmed and Flint (2020), who found analysts to be overly optimistic. However, this notion is difficult to justify based on present findings regarding the majority of the line items, which showed downward error. The Profit after tax (PAT), Headline Earnings Per Share (HEPS) and Price/Earnings (P/E) ratios resulted in a majority providing a downward error by analysts. The factor affecting all three ratios is an overestimation of expenses. Overall, the downward error for the PAT, HEPS, P/E and share price indicates that analysts are not influenced by the relationship created when they are paid for research by their subject company.
Bid-ask spread
The bid-ask spreads of sample companies with sponsored coverage (small-cap companies) were compared to the bid-ask spreads of other companies in the small-cap segment. The dataset contained an outlier in the sponsored coverage category. To mitigate the impact of this outlier, the researcher calculated the median as well as the mean. The outlier company had a bid-ask of 49.40 for 2022, was from the materials industry and had a market capitalisation of R92 billion. This company’s market capitalisation was below the average for both sponsored and non-sponsored companies, indicating a small company with relatively illiquid shares.
The results are illustrated in Figure 1. Both the mean and median are disclosed to account for potential outliers and increases in the number of companies paying for research.
The results showed that the bid-ask spreads for companies that paid for research were greater than the bid-ask spreads for companies that had no coverage. Based on the expected benefits of having analyst coverage, it was surprising that no clear inferences could be made with regard to a reduction in bid-ask spread.
Conclusion
The purpose of this study was to examine whether company-sponsored research contributes decision-useful information to capital markets in the context of the JSE. The findings show that analysts tend to simplify the information presented in financial statements, emphasising key financial metrics that are deemed more relevant to investors and creditors. In this regard, analysts may be filling an information gap or acting as information intermediaries (Asquith et al. 2005; Healy & Palepu 2001) by addressing market and valuation factors that are not expected to be fully captured in the financial statements.
The analysis of forecast accuracy revealed a tendency towards optimism in revenue projections. However, the study also highlights that analysts tend to be more conservative in their predictions regarding expenses, resulting in downward errors in their projections of profits. Notably, we do not find evidence of the upward error of share price forecasts that may arise because of conflicts of interest. Furthermore, the comparison of bid-ask spreads indicated that company-sponsored analyst coverage does not always lead to improved liquidity.
These findings contribute to the literature examining the incentives and behaviour of analysts, which has shown both optimism bias and the potential influence of analyst–firm relationships on forecast outcomes (Ahmed & Flint 2020; Kirk 2011). Furthermore, the comparison of bid-ask spreads indicated that company-sponsored analyst coverage does not always lead to improvements in the spread, echoing the mixed empirical evidence on whether analyst coverage consistently improves trading liquidity (Gao et al. 2018).
Given its exploratory nature, the findings of this study open avenues for future research, particularly with regard to the role of analysts within the South African context. Future, quantitative studies would be possible as the number of companies that pay for coverage increases, as indicated by the trends in our findings. The studies could examine the relationship between forecast accuracy and other variables analysed in the present study, such as market capitalisation, industry and the extent of conflict of interest. Research could explore whether sponsored coverage enhances liquidity for smaller companies, or whether other factors, such as the broader market context or the type of analysts providing coverage, play a more significant role. Our findings also indicate potential for further qualitative research, including the use of natural language processing techniques to examine the tone and potential optimism or bias in sponsored versus independent analyst reports, building on growing interest in textual analysis within financial research (Bradley et al. 2022; Lee & Manochin 2021).
Another area for future research is to investigate whether there is a relationship between audit opinions and the use of company-sponsored analyst research. For example, firms receiving modified or qualified audit opinions may seek additional analyst coverage to provide further explanation or reassurance to investors, while investors may rely more heavily on analyst interpretations when financial reporting quality is uncertain.
A limitation of the study relates to the use of a single measure, bid-ask spreads, as an approximation of information asymmetry. While the bid-ask spread is commonly used in the literature as an indicator of information conditions in the market, it is also influenced by a range of other factors, including overall liquidity conditions, firm size, share price volatility, the availability of freely tradable shares and the impact of corporate events or market news. Future empirical studies have a contribution to make by controlling for these additional determinants.
By way of practical contribution, the findings highlight the potential for clear governance structures around sponsored research, given the increased prevalence of such coverage. As in exchanges in other jurisdictions, stock exchanges could consider implementing disclosure requirements to enable identification of sponsorship arrangements. Such a measure would help ensure that sponsored coverage contributes positively to the information environment while mitigating potential concerns regarding conflicts of interest (Kirk 2011; SEC 2006).
The study’s findings may also be useful in providing guidance to smaller firms that may be considering sponsored analyst coverage as a means of improving market visibility. The findings of this study suggest that sponsored analysts can add value by interpreting financial information and highlighting key valuation metrics for investors. However, the absence of consistent improvements in liquidity indicates that sponsored research may enhance the interpretability of firm information without significantly altering market dynamics. By highlighting both the potential benefits and the limitations of sponsored coverage, this study provides smaller firms with a more balanced basis on which to evaluate whether engaging sponsored analysts aligns with their investor communication strategies.
Acknowledgements
This article is based on research originally conducted as part of Leon Gwatipedza’s master’s thesis titled ‘Filling an information gap? A content analysis of company-sponsored analyst reports for JSE-listed companies’, submitted to the Faculty of Commerce, Law and Management, University of the Witwatersrand in 2024. The thesis is currently unpublished and not publicly available. The thesis was supervised by Avani Sebastian. The thesis was reworked, revised and adapted into a journal article for publication. The authors confirm that the content has not been previously published or disseminated and complies with ethical standards for original publication.
Competing interests
The authors, Leon Gwatipedza and Avani Sebastian, declare that they have no financial or personal relationships that may have inappropriately influenced them in writing this article.
CRediT authorship contribution
Leon Gwatipedza: Data curation, Formal analysis, Methodology, Validation, Writing – original draft. Avani Sebastian: Conceptualisation, Methodology, Supervision, Writing – review & editing. All authors reviewed the article, contributed to the discussion of results, approved the final version for submission and publication, and take responsibility for the integrity of its findings.
Funding information
The authors received no financial support for the research, authorship and/or publication of this article.
Data availability
The data that support the findings of this study are available from the corresponding author, Avani Sebastian, upon reasonable request.
Disclaimer
The views and opinions expressed in this article are those of the authors and are the product of professional research. They do not necessarily reflect the official policy or position of any affiliated institution, funder, agency or that of the publisher. The authors are responsible for this article’s results, findings and content.
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