Firm Size and the Benefit of Analysts' Heterogeneous Interpretations

I examine the role of analysts in providing heterogeneous interpretations of public disclosures, specifically earnings announcements. Consistent with the predictions of Indjejikian's (1991) model, I document that there are relatively more heterogeneous interpretations in the forecast revisions for larger firms after earnings announcements. Consistent with the risk sharing benefits of such heterogeneous interpretations, I show that this result is related to the association between firm size and the benefits of aggregating individual forecasts. The results are consistent with recent studies indicating that analysts act as information intermediaries who speed the transmission of information in markets (Brennan et al. 1993; Hong et al. 2000), but also indicate an association between the level of analysts' activity and the degree of heterogeneous interpretations of public disclosures (Varian 1989)