Timeliness of Analysts' Forecasts: the Informational Role of Follower Analysts

Abstract

A significant percentage of firms today are followed by numerous security analysts. In this paper, we attempt to understand the informational role played by analysts when multiple analysts follow a specific firm. We classify analysts as leaders and followers based on the relative timeliness of their earnings forecasts. Our focus is on follower (or less timely) analysts whose role on surface appears to be superfluous, given that their forecasts lag those of analyst leaders. We examine whether follower analysts add value as financial intermediaries and inquire into the source of the "value added". Our empirical analysis reveals several interesting observations: (i) the "news" in forecasts issued by follower analysts has a significant impact on trading volume and stock price; (ii) the impact of forecast news on both trading volume and stock price, although significant, dissipates with successive follower analysts; (iii) the news in forecasts issued by the least timely analyst also conveys incremental information to the market; (iv) follower analysts incorporate information from both public and private sources in their forecasts and their private information generates consistently significant price impact; (v) analyst followers add value by issuing more accurate forecasts than leaders who appear to trade off accuracy for timeliness; (vi) a multivariate analysis reveals that, compared to leaders, followers follow more firms and issue more frequent forecasts for a firm, but forecast fewer horizons (one-quarter ahead, two-quarters ahead, etc.) and a smaller number of dimensions (cash flow, sales, etc.). Further, compared to leaders, followers have less experience and a smaller percentage of them belong to large brokerage firms. Overall, we conclude that analyst leaders and followers can be viewed as complementary market participants: while some analysts provide timely information to the market, others deliver more accurate reports but with some time delay.

JEL Classification: G29, D82