Does the Scope of the Sell‐Side Analyst Industry Matter? An Examination of Bias, Accuracy, and Information Content of Analyst Reports

Abstract

We examine changes in the scope of the sell-side analyst industry and whether these changes impact information dissemination and the quality of analysts' reports. Our findings suggest that changes in the number of analysts covering an industry impact analyst competition and have significant spillover effects on other analysts' forecast accuracy, bias, report informativeness, and effort. These spillover industry effects are incremental to the effects of firm level changes in analyst coverage. Overall, a more significant sell-side analyst industry presence has positive externalities that can result in better functioning capital markets. 1 The growth in the sell-side analyst industry is significantly smaller than that for other finance professionals during this period (Greenwood and Scharfstein (2013)), suggesting that the costs and benefits of sell-side analyst activities likely differ from those of other finance-related activities. Unlike investment bankers or traders, analysts are often a cost center, and attributing how much they contribute to the overall bank activity is difficult even with the best data. Further, the role and contribution of analysts has changed significantly over time. For example, the Global Settlement weakened the connection between analyst activities and investment banking revenue, and trading commissions have declined significantly in recent years. In addition, advances in technology and increased corporate disclosure requirements have lowered the cost of independent financial analysis.

Do Analysts Who Move Markets Have Better Careers?

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“…The analyst is classified as ranked by Institutional Investor (II) if she is on the Institutional Investor's All-America ranking list for that year (any ranking profession. These numbers are close to those reported in the literature (Hong and Kubik 2003;Merkley, Michaely, and Pacelli 2016). There is an increase in turnover around the 2000-2002 bubble.…”

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