Do Social Interactions Communicate or Garble Information? Evidence from Equity Analysts

Abstract

We examine the effects of social interaction among equity analysts on the transmission of geographic-specific information and the quality of analysts’ forecasts. We focus on interactions among local peers, defined as analysts who work in the same brokerage office (officemates) who cover different firms in the same area. We find that analysts with local peers produce more accurate earnings forecasts and generate stronger stock market responses. Their forecasts are less optimistically biased and less affected by area-specific errors in the consensus forecasts. We also find that geographic momentum in stock returns is weaker when firms are followed by analysts with local peers, and that analysts are more likely to initiate coverage of firms with more local peers. Our findings suggest that social interactions among analysts transmit useful geographic-specific information.

Keywords: Social Interaction, Financial Analysts, Geographic Information

JEL Classification: G10, G11, G12, G14, G23, G24