Do equity analysts reflect private information about SEC investigations?

This paper examines whether sell-side equity analysts are aware of and incorporate negative private information about ongoing SEC investigations into their stock recommendations. Using firm-quarter and firm-analyst-quarter level panels from 1995 to 2017, I find that analysts issue significantly more pessimistic recommendations during quarters when the target firm is under SEC private investigation. The stacked DiD results help mitigate endogeneity concerns and suggest that the downtrends in equity analysts’ recommendations occur in a timelier manner than credit analysts. A complementary changes analysis based on downgrade events further corroborates that analysts revise their recommendations downward during early investigation quarters. Analysts with investment banking ties to the firm are more likely to issue lower recommendations during investigations, whereas those with access to investor conferences or selected to ask questions on earnings calls are not. Additionally, different types of investigations such as their classification and materiality also influence both firms’ disclosure decisions and analysts’ awareness of ongoing nonpublic investigations. Overall, these findings contribute to our understanding of equity analysts’ information intermediary role by documenting that they become aware of nonpublic investigations through private information acquisition.