Supply chain information in analyst reports on publicly traded companies

Highlights

• Equity analysts do use supply chain information for reports and recommendations.

• The importance of supply chain factors identified by analysts vary across industries.

• Positive supply chain information is related to the type of recommendation.

Abstract

Analyst reports are an important source of secondary data on companies for understanding a company’s performance in the recent past and for getting guidance on its future performance. We therefore analyzed the text of 1028 equity analyst reports of 145 Fortune 500 Global companies (not including services sectors like IT or banking) published between 2009 and 2011 for supply chain related information. We found that nearly three-fifths of these reports contained supply chain information pertaining to inbound, process or outbound aspects of the supply chain of the company. At the report level, there are significant industry effects for supply chain related content in analyst reports. On the other hand, aggregating information at the company level, it appears that analysts focus on a particular supply chain aspect for a company as well as its sector. Furthermore, logistic regression analysis suggests a link between the supply chain information provided when this is positive in orientation and the buy/sell/hold recommendation of the analyst regarding the company’s stock.

Introduction

Analyst reports on companies provide secondary information based on the information gathered by analysts from diverse sources including the companies’ top management. The information in these reports is useful in explaining financial and stock performance in the recent past as well as in guiding investors on the expected future performance as well as stock price. Indeed there is extensive literature analyzing the numerical part of analyst reports and the earnings forecast (e.g. Abdel-Khalik and Ajinkya, 1982; Asquith et al., 2005) and stock recommendations (e.g. Beneish, 1991; Elton et al., 1986; Francis and Soffer, 1997; Hirst et al., 1995; Stickel, 1995; Womack, 1996). More recently, there have also been analyses of the textual part of these reports (Asquith et al., 2005, Bradshaw, 2002, De Franco et al., 2011, Huang et al., 2012) to help understand the company’s financial performance.

Researchers have established the link between shareholder value and supply chain initiatives (e.g. Christopher and Ryals, 1999; D׳Avanzo et al., 2003; Anderson et al., 2004; Hendricks et al., 2007; Sridharan et al., 2005; Mitra and Singhal, 2008; Randall and Farris, 2009). As such, we expect analysts to discuss the supply chain information of companies from these sectors. However, to our knowledge, no studies have focused on the provision of supply chain related information in the textual parts of the analyst reports. We strive to fill this gap by exploring the nature of supply chain information in the text of analyst reports and by seeking to link it to the analysts/buy/sell/hold recommendations.

To do so, we gathered the text of 1028 equity analyst reports of Global Fortune 500 companies published between January 2009 and December 2011. Next, we used content analysis to code the textual part of analyst reports to understand the analysts׳ use of supply chain information particularly by industry sector at the report level. Finally, we used logistic regression to test the link between the analyst’s buy/sell/hold recommendation and the nature of the supply chain information.

We found that supply chain issues reported by analysts on the particular aspect of the supply chain – inbound, outbound or process – are much more dependent on the individual company rather than the company’s industry sector. The analyst provides this information with a positive or a negative orientation. Logistic regression based analysis suggests a significant positive link between positive supply chain related information and the recommendation issued by analysts. However, we did not find a significant relationship between supply chain information with a negative interpretation and the recommendation.

Our contribution to the supply chain literature is to introduce analyst reports as a potential useful source of secondary data about companies’ supply chains and present some preliminary analysis linking it to buy/sell/hold recommendations. This secondary data is useful in that it targets investors (and therefore top management seeking to increase shareholder value). Being accessible to researchers, this data affords replication of research findings.

The remainder of this paper is organized as follows. Section 2 provides theoretical underpinnings and the prior literature on supply chain management (SCM), shareholder value and analyst reports. Section 3 describes the data collection of analyst reports followed by Section 4 providing our findings in three parts: frequency analysis at the industry level, cluster analysis at the company level and logistic regression to find the link between supply chain information and the analyst’s recommendation section. Section 5 provides a discussion and areas for further research before the conclusion in Section 6.