Financial Analysts’ Long-Term Growth Forecasts and Market Efficiency with Respect to Firms’ Innovative Efficiency

Abstract

This paper investigates the role of financial analysts’ long-term growth (LTG) forecasts in stock market efficiency with respect to information about firms’ innovative efficiency (IE). Hirshleifer, Hsu, and Li (2013) attribute evidence of market inefficiency with respect to IE information to investor limited attention constraints. We predict and find that innovatively efficient firms attract analyst publication of long-term growth (LTG) forecasts. Further evidence suggests that these forecasts proxy for analyst attention to long-term prospects, thus mitigating investor inattention and market underreaction to IE information. Our results also indicate that analysts publishing LTG forecasts bring more private information to bear on firms whose prospects depend on IE. Furthermore, we find that forecasted LTG rates increase with firms’ IE. Finally, analysts’ LTG forecasting experience and expertise in analyzing the implications of technological innovation further attenuate analyst and market inefficiency with respect to IE information. When attracted to research-intensive firms, analyst publication of LTG forecasts apparently corresponds to a long-term perspective that mitigates investor inattention and market underreaction to IE information.