Analysts’ Superiority in Processing Public Information: Evidence from Recommendation Revisions

This paper documents strong evidence that analysts' recommendation revisions issued subsequent to annual earnings announcements convey valuable information to investors for clarifying long-term implications of recently released earnings. These revisions significantly alter investors' beliefs about the value implications of announced earnings, suggesting that analysts do have superiority over investors in processing public information. Furthermore, the extent of this superiority is positively related to analysts' performance in picking stocks and forecasting earnings. Specifically, recommendation revisions issued by analysts with superior performance can cause investors to revise their assessments of the value implications of previous earnings to a much greater extent than those issued by analysts with moderate performance. In addition, the extent of this superiority also increases with the level of information complexity of earnings signals. Analysts' information is more valuable to investors for reevaluating previous earnings when the earnings information is more difficult to interpret. Finally, the extent of this superiority has declined after Regulation Fair Disclosure, but remains significant nevertheless, suggesting that analysts do not solely rely on inside information from management to interpret public information. In addition, I find that such a decline is likely due to a substantial increase (after Regulation Fair Disclosure) in the number of analysts making recommendation revisions following earnings announcements who lack expertise in processing public information.