Of Leaders and Followers - An Econometric Analysis of Equity Analysts and Stock Market Investors

We measure the information content of monthly analyst consensus forecasts for one-year-forward earnings per share (EPS) based on two well-established price discovery measures drawn from the area of market micro-structure research. Employing a 36-year sample of large US companies listed in the S&P 100 Index, we compute (i) Hasbrouck's information shares and (ii) Gonzalo and Granger's common factor component shares to measure the relative share that market participants and analysts have in the process of price discovery. We find that while analysts do not lead the capital market, they have a small but significant share in the process of price discovery, amounting to 4.6% (Hasbrouck) and 18.0% (Gonzalo and Granger) on average. This share varies significantly in the cross-section. We identify the level of analyst coverage as an explanatory factor: The greater a company's coverage, the smaller is the analysts' information share. This finding can be explained by analysts' herding behavior as well as by company incentives, which lower the information content of their estimates