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

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  • Choi, Hae Mi
  • Gupta-Mukherjee, Swasti

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.

Suggested Citation

  • Choi, Hae Mi & Gupta-Mukherjee, Swasti, 2022. "Analysts’ reliance on industry-level versus firm-specific information: Implications for information production," Journal of Banking & Finance, Elsevier, vol. 143(C).
    • Handle: RePEc:eee:jbfina:v:143:y:2022:i:c:s0378426622001510
    DOI: 10.1016/j.jbankfin.2022.106555
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    More about this item

    Keywords

    Analyst forecasts; Rational inattention; Analyst incentives; Forecast accuracy; Forecast frequency;
    All these keywords.

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G29 - Financial Economics - - Financial Institutions and Services - - - Other
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles

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