Analyst Following Along the Supply Chain and Forecast Accuracy

Abstract

This study investigates whether analysts strategically construct their portfolios along the supply chain. We document four major findings. First, the likelihood of an analyst following a firm’s major customer increases with the strength of the economic tie along the supply chain, as measured by the percent of the firm’s sales to its customer. Second, analysts who follow the firms’ major customers incorporate the customers’ earnings news into their forecast revisions for the (supplier) firms, but other analysts do not. Third, by following the major customer firms, analysts can improve the accuracy of their earnings forecasts for the supplier firms. Fourth, the improvement in forecast accuracy attributed to following a firm’s customers is statistically as important as the effect of following the firm’s industry peers. We obtain these results while controlling for the analysts’ endogenous choice of covering a firm’s major customers.

Keywords: Supply chain, Information transfers, Analyst following, Forecast revisions, Forecast accuracy

JEL Classification: D80, G14, M41