Idiosyncratic Earnings and Analyst Forecast Properties

We examine how the precision of consensus analysts forecasts varies with the degree of idiosyncratic information embedded in a firm's earnings. We find that greater idiosyncratic earnings—reflecting more firm‐specific information—is associated with higher precision of public as well as private information as defined in Barron et al. (1998). The latter result is consistent with analysts increasing their information acquisition efforts when less common information is available. To validate these findings, we show that higher idiosyncratic earnings lead analysts to update forecasts more promptly; again, consistent with greater efforts. Additionally, greater idiosyncratic earnings are associated with a higher cost of capital, consistent with idiosyncratic earnings reflecting greater private information. However, this increase in the cost of capital is attenuated when analysts' private information is more precise. Both patterns are consistent with the theoretical framework of Easley and O'hara (2004). Overall, our findings clarify the complex role of idiosyncratic earnings in the information environment and offer researchers a new accounting‐based proxy for distinguishing between firms' public and private information environments.