Analysts’ reliance on industry-level versus firm-specific information: Implications for information production

Hae Mi Choi and Swasti Gupta-Mukherjee

Journal of Banking & Finance, 2022, vol. 143, issue C

Abstract: Motivated by models of rational inattention, we study the information choices of sell-side analysts who face attention constraints in acquiring and processing costly information. We empirically examine analysts’ relative reliance on industry-level (i.e. macro) and firm-specific (i.e. micro) information in generating firms’ earnings forecasts. We find that analysts’ reliance on industry-level relative to firm-specific information decreases with available resources and their incentives to allocate effort towards firm-specific research. Specifically, analysts’ relative reliance on industry-level information increases with the number of firms and industries covered, while it decreases with brokerage size and experience. Analysts’ relative reliance on industry-level information decreases when they face more competition and cover firms with more career-related potential rewards for firm-specific research, such as large firms, and firms with high trading volume and institutional ownership. Moreover, analysts who rely relatively more on industry-level information issue less accurate but more frequent forecasts. Together, the evidence is consistent with analysts’ reliance on industry-level versus firm-specific information indicating a strategic allocation of effort among different aspects of information production, i.e. quality and quantity of earnings forecasts.

Keywords: Analyst forecasts; Rational inattention; Analyst incentives; Forecast accuracy; Forecast frequency (search for similar items in EconPapers)
JEL-codes: G02 G14 G24 G29 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:143:y:2022:i:c:s0378426622001510

DOI: 10.1016/j.jbankfin.2022.106555

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