Industry sensitivity to external forces, and the industry-level information advantage of analysts over managers when forecasting earnings

Abstract

This paper examines whether analysts have an industry-level information advantage over managers when forecasting earnings. We argue that such an advantage is more likely to exist in industries where firm performance is more sensitive to industry-level external economic forces. We find that for such firms, the relative earnings forecast accuracy of analysts compared to managers is larger. We further find that managers of such firms provide fewer and less precise (e.g., range rather than point estimate) forecasts, and that this association is more pronounced in firms with higher analyst following. Collectively, these findings suggest that analysts have industry-level information advantage over managers when forecasting earnings for industries with certain characteristics.

Keywords: Management earnings forecasts, analyst earnings forecasts, analysts’ industry expertise, analysts’ industry-level information advantage over managers, industry sensitivity risk