The Acquisition and Integration of Street Earnings: Evidence from a Natural Experiment

Abstract

In September 2009, Thomson Reuters (TR) discontinued its practice of relying on analysts to acquire street earnings when unexpected items are present, resulting in street earnings that are timelier and more predictive of future performance. We use this event as an exogenous shock to analysts' information processing to study the interactions between information acquisition and integration. Adopting a difference-in-differences approach, we find that after 2009 analysts treat unexpected items more similar to TR, consistent with improved acquisition, and issue more accurate and less dispersed forecasts, consistent with improved integration. The net effect of these changes strengthens (weakens) the intermediary role of TR (analysts), as evidenced by street earnings (analyst forecasts) having greater (smaller) price impact. Finally, we find that a significant portion of TR's effect on price discovery is through its effect on analysts. Our results highlight the interconnected nature of information acquisition and integration in capital markets.

Keywords: street earnings, processing costs, information acquisition, information integration, price discovery, analyst forecasts

JEL Classification: M41, G14, G23