Do Managers Learn from Analysts about Investing? Evidence from Internal Capital Allocation

The Accounting Review, Forthcoming

52 Pages Posted: 9 Jun 2022 Last revised: 9 Nov 2022

See all articles by Re-Jin Guo

Re-Jin Guo

University of Illinois at Chicago - Department of Finance

Rong (Irene) Zhong

University of Illinois at Chicago - Department of Accounting

Date Written: June 3, 2022

Abstract

Analysts are recognized for their expertise in predicting industry growth, yet little is known about whether CEOs learn from analysts’ insights to guide investment decisions. Focusing on conglomerates where CEOs are underinformed about segment growth opportunities, we find that CEOs learn industry insights from analysts to adjust internal capital allocation. The extent of learning increases when analysts have closer proximity to CEOs or expertise in segments where CEOs face larger internal knowledge gaps. CEOs likely learn from analysts through private communications, as the insights learned are not yet publicly available, difficult to replace with other sources, and persistently impactful for firms. CEOs also exploit conference calls as another way to learn from analysts. As a result, learning analysts’ insights enhances firm value. We employ brokerage mergers/closures as a quasi-experiment to address endogeneity concerns. Overall, our study provides novel evidence on a learning channel through which analysts add value to firms.

Keywords: learning, industry insights, uncertainty, private information set, internal knowledge gap, investment efficiency

JEL Classification: D80, D83, G10, G31

Suggested Citation

Guo, Re-Jin J. and Zhong, Rong (Irene), Do Managers Learn from Analysts about Investing? Evidence from Internal Capital Allocation (June 3, 2022). The Accounting Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=4127125 or http://dx.doi.org/10.2139/ssrn.4127125

Re-Jin J. Guo

University of Illinois at Chicago - Department of Finance ( email )

2431 University Hall (UH)
601 S. Morgan Street
Chicago, IL 60607-7124
United States
312-413-3718 (Phone)

Rong (Irene) Zhong (Contact Author)

University of Illinois at Chicago - Department of Accounting ( email )

601 South Morgan Street
University Hall, Room 2303
Chicago, IL 60607
United States

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