Do Analysts Read the News?

Abstract

We examine whether and how the general supply of firm information via media news sources influences equity analysts' earnings forecast revisions (EFRs). Combining large databases of U.S. firm-specific public news stories and individual sell-side equity analysts' EFRs from 2000 to 2010, we find that equity analysts' EFRs are significantly influenced by the tone of the news. The relation between news and EFRs is stronger when the news contains information regarding firm fundamentals. We also find that media news influences analysts' forecast revision more when firm information asymmetry is larger and when analysts face stronger conflicts of interest. However, they generally respond to news with a lag; consequently, the market reacts less favorably when analysts' revisions are based on stale news.

Keywords: Sell-side analysts, Business media, Public news, Earnings forecast revisions