Accounting Expertise and Capital Market Outcomes: Evidence from Equity Research Analysts

We examine whether and how accounting expertise facilitates the incorporation of financial information into stock prices. Using equity research analysts as a proxy for a primary user of financial reports, we find that firms covered by a higher proportion of analysts with accounting expertise (“accounting analysts” hereafter) experience stronger market reactions to earnings news during earnings announcements. We show that one channel by which accounting analysts improve market responsiveness to earnings news is through more pronounced target price revisions to earnings surprises. Results also indicate that accounting analysts accelerate information incorporation, contributing to faster price discovery during earnings announcements. Moving away from a routine earnings announcement setting to a more extreme stock price crash setting, accounting analysts issue more pessimistic target price forecasts before price crashes, specifically for firms with high financial reporting opacity, indicating accounting expertise to identify signs of impending distress. Analysis of analyst reports confirms accounting analysts’ focus on accounting issues and details. Our findings highlight positive capital market effects associated with participant accounting expertise.