Information interpretation or information discovery: which role of analysts do investors value more?

Abstract

This study provides evidence that a significant percentage of analyst forecast revisions are issued promptly after a broad set of corporate public disclosures and that investors perceive these prompt revisions as more valuable than non-prompt revisions. These results hold for all revisions, non-earnings announcement triggered revisions, or revisions in weeks preceding earnings announcements, and are also robust to various sensitivity tests. Investors particularly value analysts’ prompt interpretation of earnings announcements or 8-K filings. To the extent that prompt revisions are more likely to reflect analysts’ information interpretation role, our results suggest that investors value more highly analysts’ ability to interpret public disclosure, especially less structured or non-financial disclosures. Unlike Ivkovic and Jegadeesh (2004) and Chen et al. (2010) which reach the opposite conclusion, we analyze analysts’ interpretation role with respect to a broader range of significant corporate disclosures than earnings announcements alone. We also provide evidence that analyst revisions made on the day of preliminary earnings announcements or the next day are significantly associated with excess returns, even after controlling for earnings and revenue surprises and accruals available in the announcements.