Competition or Spillover? Star Analyst Co-coverage and Firms’ Information Environment

Abstract

Existing literature commonly uses analyst coverage as a proxy for firms’ information environment, yet remains agnostic as to the mechanism driving this relationship. We find that star analysts concentrate their efforts and generate substantially more accurate earnings forecasts in multi-star stocks, in which they cross paths with other stars. Using the Institutional Investor (I/I) rankings, we show that an exogenous drop in competition—involving no change in the firm’s information environment—is followed by an increase in forecast error. Our evidence suggests that star analysts compete against each other, rather than learn from one another.

Keywords: star analysts, tournament incentives, forecast error, earnings predictability, firms’ information environment

JEL Classification: G20; G23; G24