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We measure the information content of monthly analyst consensus forecasts for one-year-forward earnings per share (EPS) based on two well-established price discovery measures drawn from the area of market micro-structure research. Employing a 36-year sample of large American companies listed in the S&P 100 Index, we compute (i) Hasbrouck's information shares and (ii) Gonzalo and Granger's common factor components to measure the relative share that the capital market and the analysts have in the process of price discovery. We find that while analysts do not lead the capital market, they have a small but significant share in the process of price discovery, amounting to 4.5% (Hasbrouck) or 18.0% (Gonzalo and Granger) on average.This share varies significantly in the cross-section. We identify a company's analyst coverage as an explanatory factor: The larger the coverage, the lower is the analysts' information share. This finding can be explained by analysts' herding behavior, which lowers the information content of their estimates.JEL Classification: G12, G14, G17, G2, C32, C53, D82

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Abstract:This paper bridges two recent studies on the role of analysts to provide new and relevant information to investors. On the one hand, the contribution of analysts to long-term price discovery on the US market is rather low. Considering earnings per share forecasts as the main output of analysts' reports, their information share amounts to only 4.6% on average. On the other hand, trading strategies set up on these EPS forecasts are quite profitable. Self-financing portfolios yield excess returns of more than 5% p.a. over the S&P 100 index for a time period of 36 years, which is persistent after controlling for the well-known risk factors. In this paper, we discuss the link between the low information shares and the high abnormal returns. We argue that information shares of analysts cannot be higher, because otherwise their forecasts would lead to excessively profitable trading strategies which are very unlikely to persist over such a long period of time.