Determinants of the Informativeness of Analyst Research

Analyst research helps prices reflect information about a security’s fundamentals. However, analysts’ private incentives potentially contribute to misleading research and it is possible that the market fixates on such misleading and/or optimistic reports. We examine cross-sectional determinants of the informativeness of analyst reports, i.e., their effect on security prices, controlling for endogeneity among the factors affecting informativeness. Analysts are more informative when the potential brokerage profits are higher (e.g., high trading volume and high volatility) and when they reveal ‘bad news.’ Analyst informativeness is reduced in circumstances of increased information processing costs. We fail to find evidence that informativeness of analyst reports is due to market’s fixation or overor under-reaction to analyst reports. We are grateful to Wayne Guay for helpful comments. Determinants of the Informativeness of Analyst Research “No matter what the market does, analysts just seem to keep saying ‘buy,’ ” said Senator Joseph Lieberman (D., Conn.). One reason for this, he suggested, is that banks and investment firms for which the analysts work earned millions of dollars arranging mergers or stock offerings for the companies being analyzed. “These influences compromise analysts’ objectivity and mean that the average investor should take their bottom line recommendation with at least a grain of salt, if not a whole bucket,” Mr. Lieberman said. (The Wall Street Journal, February 28, 2002, p. A3).