The informational role of financial analysts: Interpreting public disclosures

While it is widely acknowledged that financial analysts play an increasingly vital informational role in capital markets, the precise nature of analysts’ informational role in capital markets is not well understood. Commentators frequently assume that analysts obtain their most useful (private) information directly from the management of the firms they follow, rather than processing information to independently develop their own insights. Indeed, recently enacted regulatory changes, such as Regulation FD (Fair Disclosure) in the United States, have been motivated in large part by this belief. This paper reviews a recent stream of academic research that suggests an alternative perspective on the informational role of financial analysts in capital markets. This research suggests that, at least in the case of earnings forecasts made by active analysts, financial analysts mainly perform a role of processing and interpreting publicly available accounting disclosures, rather than relying primarily on privileged communications with corporate management. Thus, analysts’ primary informational contribution to capital markets comes mainly from their own unique interpretations of firms’ public disclosures. This goes some way to explaining why there can be a demand for large numbers of analysts (e.g., more than twenty) to follow some firms.