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

Abstract

We examine whether social interactions among local peers, defined as analysts working in the same brokerage office who cover different firms headquartered in the same area, communicate or garble information. We find that analysts with local peers produce more accurate earnings forecasts and their forecast revisions generate stronger stock market responses. Their forecasts are less optimistically biased and less affected by common errors in 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. These findings indicate that social interactions among local peer analysts can transmit useful information.

Keywords: Social Interaction, Financial Analysts, Geographic Information

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