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Analysts’ Incentives to Produce Industry-Level versus Firm-Specific Information

Published online by Cambridge University Press:  15 February 2011

Mark H. Liu
Mark H. Liu*
Affiliation:
University of Kentucky, 437A Gatton College of Business and Economics, Lexington, KY 40506. [email protected]
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Abstract

Using stock returns around recommendation changes to measure the information produced by analysts, I find that analysts produce more firm-specific than industry-level information. Analysts produce more firm-specific information on stocks with higher idiosyncratic return volatilities. The amount of industry information produced by analysts increases with the absolute value of the stock’s industry beta and decreases with the stock’s idiosyncratic volatility. Other stocks in the industry also respond to the recommendation change, and the magnitude of the response increases with the absolute value of the industry beta of the recommended stock and that of other stocks in the industry. I also offer results on how investors may use analyst research more effectively and potentially improve their investment performance.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 46 , Issue 3 , June 2011 , pp. 757 - 784
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2011

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