We examine changes in the scope of the sell-side analyst industry and whether these changes impact information dissemination and the quality of analysts' reports. Our findings suggest that changes in the number of analysts covering an industry impact analyst competition and have significant spillover effects on other analysts' forecast accuracy, bias, report informativeness, and effort. These spillover industry effects are incremental to the effects of firm level changes in analyst coverage. Overall, a more significant sell-side analyst industry presence has positive externalities that can result in better functioning capital markets. 1 The growth in the sell-side analyst industry is significantly smaller than that for other finance professionals during this period (Greenwood and Scharfstein (2013)), suggesting that the costs and benefits of sell-side analyst activities likely differ from those of other finance-related activities. Unlike investment bankers or traders, analysts are often a cost center, and attributing how much they contribute to the overall bank activity is difficult even with the best data. Further, the role and contribution of analysts has changed significantly over time. For example, the Global Settlement weakened the connection between analyst activities and investment banking revenue, and trading commissions have declined significantly in recent years. In addition, advances in technology and increased corporate disclosure requirements have lowered the cost of independent financial analysis.

Changing economic conditions over the past two decades have created incentives for sell-side analysts to both provide their institutional clients tiered services and to streamline their written research process. One manifestation of these changes is an increased likelihood of analysts’ issuing earnings forecasts for multiple firms on the same day. We identify this bundling property and show that bundling has increased steadily over time. We provide field evidence that the practice is a cost-saving measure, a natural by-product of analysts focusing on thematic research, and a reflection of forecast updating that occurs in advance of important events. Our empirical analyses show that bundled forecasts are less accurate, less bold, and less informative to investors than nonbundled forecasts. We also find that analysts who produce bundled forecasts provide valuable specialized services to their institutional clients. Our findings ultimately demonstrate that forecast bundling has important implications for the properties of analysts’ forecasts. This paper was accepted by Shiva Rajgopal, accounting.

No abstract

No abstract