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

This paper documents strong evidence that first analysts' recommendation revisions issued subsequent to quarterly 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 are more superior than investors in processing public information. Furthermore, the extent of this superiority is positively related to analysts' performance in picking stocks and forecasting earnings. In addition, the extent of this superiority increases with the level of information complexity of earnings signals. Finally, analysts have maintained similar level of superiority since Regulation Fair Disclosure became effective, suggesting analysts do not primarily rely on inside information from management to interpret public information. They truly have better analytical skills than average investors.