Do Analysts Incorporate Market/Industry-Wide or Firm-Specific Information into Stock Price: Some Evidence on the Role of Earnings Quality

41 Pages Posted: 29 Nov 2013

See all articles by Shimin Chen

Shimin Chen

China Europe International Business School (CEIBS)

Ferdinand A. Gul

Monash University Sunway Campus

Jing Zhou

Shanghai University of Finance and Economics - School of Accountancy

Date Written: October 6, 2013

Abstract

Motivated by recent controversies on the information role of financial analysts, this study examines whether firm level transparency proxied by accounting quality affects the mix of market/industry-wide vs. firm-specific information provided by analysts. Specifically, we show that better earnings quality encourages analysts to incorporate more firm-specific information into stock price, which leads to reduced stock price synchronicity. In addition, we find that only non-industry specialist analysts are likely to be encouraged by better earnings quality to incorporate more firm-specific information, suggesting that industry specialists have information advantage from covering different firms in one industry and are less likely to be affected by the disclosure quality of a single firm. Together, these results suggest that analysts take into consideration the cost and benefit of providing firm-specific information in determining the mix of information they help to disseminate to the capital market.

Keywords: Stock price synchronicity, Earnings quality, Analysts following

JEL Classification: G14, M41

Suggested Citation

Chen, Shimin and Gul, Ferdinand A. and Zhou, Jing, Do Analysts Incorporate Market/Industry-Wide or Firm-Specific Information into Stock Price: Some Evidence on the Role of Earnings Quality (October 6, 2013). Available at SSRN: https://ssrn.com/abstract=2360901 or http://dx.doi.org/10.2139/ssrn.2360901

Shimin Chen

China Europe International Business School (CEIBS) ( email )

Shanghai-Hongfeng Road
Shanghai 201206
Shanghai 201206
China

Ferdinand A. Gul

Monash University Sunway Campus ( email )

Jalan Lagoon Selatan
Selangor Darul Ehsan
Bandar Sunway, 46150
Malaysia

Jing Zhou (Contact Author)

Shanghai University of Finance and Economics - School of Accountancy ( email )

No. 777 Guoding Road, Shanghai
Shanghai, 200433
China

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