Is Analyst Output Informative? An Intraday Study of Analyst Comments

Conventional wisdom suggests that the public release of financial analyst output is informative to traders about firm value. However, empirical tests of this mechanism have encountered difficulties in isolating the release of analyst output from concurrent intervening events such as analysts’ private-client communications. Earnings conference calls provide a unique opportunity to overcome this obstacle: both analyst remarks and stock price movements can be measured publicly in real time. Accordingly, we find that the linguistic tone of analyst comments during the call is significantly associated with intraday returns after appropriately controlling for management disclosures, explaining about one-third of the stock price movement during the discussion period. In reacting to analyst tone, traders anticipate future analyst predictions and recommendations on the company, which can help to explain why prior studies have found mixed evidence on the price reaction to the release of those products. Overall our findings suggest that traders use the public release of analyst output to determine firm value.