Are Analysts Whose Forecast Revisions Correlate Less with Prior Stock Price Changes Better Information Producers and Monitors?

Abstract

We propose an ex ante measure of analysts’ production of private information (PPI) based on the correlations between analysts’ forecast revisions and prior stock price changes. We validate this measure by examining whether analysts with lower correlations (higher PPI) provide more information value to various stakeholders and monitor managerial behavior more effectively. We find that the stock price impacts of forecast revisions issued by analysts with higher PPI are larger than those issued by analysts with lower PPI. We also find that firms' investment sensitivity to stock prices is higher and that boards of directors rely more on analysts’ forecast errors in their CEO turnover decisions when firms are followed by analysts with higher PPI. In addition, we find that firms followed by analysts with higher PPI exhibit lower accrual discretion and are less likely to restate earnings. Overall, our findings suggest PPI captures analysts’ ability to produce private information and that analysts with higher PPI are better information producers and monitors.