Industry Expertise and the Informational Advantages of Managers and Analysts

Abstract

This paper examines whether analysts have an industry-level information advantage over managers when forecasting a firm’s earnings. We argue that such an advantage is more likely to exist for firms that operate in industries that are characterized by more uncertain operating environments due to industry-level shocks. We find that for firms in such industries, analysts provide more accurate forecasts than managers. We further find that managers of firms in such industries provide fewer and less precise (e.g., range versus point estimates) forecasts, and that these results are more pronounced when analyst following and institutional ownership are higher. These findings suggest that analysts have an informational advantage over managers with respect to industry-level information for industries with certain characteristics.

Keywords: Voluntary disclosure, management earnings forecasts, industry expertise, analysts, information asymmetry