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Electronic copy available at: http://ssrn.com/abstract=1364859
Electronic copy available at: http://ssrn.com/abstract=1364859
 
Evidence that analysts are not important information-intermediaries
For presentation at the 2010 Atlanta, Georgia, American Finance Association meetings
Oya Alt
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, Vadim S. Balashov
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, Robert S. Hansen
b,*
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 Joseph M. Katz Graduate School of Business, University of Pittsburgh, Pittsburgh, PA 15260, USA
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 A.B. Freeman School of Business, Tulane University, New Orleans, LA 70118, USA
Abstract
We report new findings that show analyst earnings forecast revisions are not particularlyinformative. Combined with the Alt
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ç and Hansen (2009) finding that analystrecommendations are information-free, the results are sufficient for concluding that analysts arenot economically important securities market information-intermediaries. Moreover, the findingsare consistent with the conclusion that security markets are informationally more efficient thanformerly believed. They suggest that analyst information processing, rather than improvingmarket efficiency by exposing underexploited bits of available information, usually reiteratesinformation that is already absorbed in stock price. They disagree with published findings thathave supported court use of the fraud on the market presumption and with the idea that analystreports were unusually informative because of management selective information disclosuresbefore Regulation Fair Disclosure (Reg FD).
 JEL classification:
D82, G11, G12, G14, G24, G28, K22, M41.
Keywords:
Analysts’ forecasts, Financial analysts, Financial markets, Investment banking,Market efficiency, Security analysts.
First draft: March 2009Latest draft: September 2009
We thank Chyhe Becker, Christa Bouwman, Kathleen Hanley, C.N.V. Krishnan, Leo Madureira, Stu Mayhew,Claudia Mois, Jörg Rocholl, and Ajai Singh for helpful comments. We are grateful for helpful comments receivedon early drafts of the paper from seminar participants at Case Western Reserve University and the European Schoolof Management and Technology, Berlin, Germany, as well as participants at the presentation of an earlier version of the manuscript to the Office of Economic Analysis of the Securities and Exchange Commission, Washington, DC.We thank Tom Noe for helpful discussion.
*
Corresponding author contact information: Tulane University, New Orleans, LA 70118Tel.: 504-865-5624, E-mail: rob.hansen@tulane.edu
 
Electronic copy available at: http://ssrn.com/abstract=1364859
Electronic copy available at: http://ssrn.com/abstract=1364859
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Introduction
The literature showing that security analyst reports release substantial information aboutstock price has been influential in at least three ways. First, broad evidence forms the empiricalfoundation for the deeply rooted and well-received view that analysts are information-intermediaries in securities markets. The analyst processes public information about a firm totrack down underexploited bits of information (i.e., information that is not yet reflected in stock price), which is frequently discoverable because of market inefficiencies. This underexploitedinformation is impounded into stock price once the analyst’s brokerage, a sell-side firm, passes itto clients in exchange for fees or other business, in one of two analyst reports: a forecast of future earnings or a recommendation to buy or sell the stock.
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 Second, the literature presents a formidable challenge to market efficiency, the idea that“prices reflect available information” (Fama, 1998). Because the information-intermediary viewis predicated on the notion that analysts’ processed information originates from marketinefficiencies, the evidence showing that analyst reports are informative also endorses theconclusion that markets are informationally very inefficient.Third, the literature has had an impact on court applications and regulatory reforms that bearon analyst behavior. Much of the evidence showing that analyst reports are informative is nowrelied upon in court application of the fraud on the market presumption to analyst forecasts. Theevidence contains support for the understanding that one effect of Regulation Fair Disclosure(Reg FD) has been to reduce the amount of private information transmitted by analyst reports,
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For discussion of the information-intermediary view, see Healy and Palepu (2001), Kothari (2001), Ramnath,Rock, and Shane (2008), and much of the literature cited herein. 
 
Electronic copy available at: http://ssrn.com/abstract=1364859
Electronic copy available at: http://ssrn.com/abstract=1364859
2
which was among the central concerns of Securities and Exchange Commission (SEC)commissioners in their decision to implement Reg FD.This study reports new findings that are sufficient to reject the information-intermediaryview. The findings are from analysts’ earnings forecast revisions, which is by far their chief report, as they revise over 125 forecasts per firm-year while changing recommendations only 12times, on average. Moreover, using intraday announcement-returns Alt
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ç and Hansen (2009)report that recommendation changes transmit virtually no information. They also show changesoften piggyback on matching news, which could leave the spurious impression that changes areinformative when informativeness is measured using mean daily returns. A number of results inLoh and Stulz (2009) agree with the Alt
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ç and Hansen (2009) finding that recommendationchanges are virtually information-free.Although it now appears that recommendation changes do not transmit vital information, alarge and growing body of research showing that analyst earnings forecast revisions areinformative is sufficient to prop up the information-intermediary view. Studies continue to showthat revisions are informative, causing mean announcement-returns of 1% to 2.5% for uprevisions and -1% to -2.5% for down revisions (Gleason and Lee, 2003; and Ivkovic andJegadeesh, 2004). The total value of these announcement-returns points to the release of enormous information value by revisions, given their great frequency. Recent studies also showthe return cross-section behavior agrees with information production (Clement and Tse, 2003;Cooper et al 2001; Asquith, Mikhail, and Au, 2005; Frankel, Kothari, and Weber, 2006; and
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