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

Abstract

Despite broad interest in analysts’ activities, our understanding of sell-side analysts as a collective group is limited. This paper examines changes in the scope of the sell-side analyst industry and whether these changes impact information dissemination. Changes in the number of analysts covering an industry affect analyst competition and have significant spillover effects. When some firms in an industry experience drops in analyst coverage, the aggregate quality of the analyst reports of other firms in an industry (i.e., firms that did not experience a direct change in analyst coverage) decreases along several dimensions: analysts’ forecasts are less accurate and more biased, they exert less effort, and their reports have lower information convergence and provide less information to market participants. We further find that the effects of changes in the number of analysts covering an industry are more pronounced in settings where analyst competition is more important. The spill-over industry effects we find are incremental to the effects of firm level changes in analyst coverage. Overall, having a more significant sell-side analyst industry presence has positive externalities that can result in better functioning capital markets.