Analyst talent, information, and insider trading

We examine 1984–2018 data and show that the talent or ability of sell-side financial analysts affects a covered firm's information environment—more so than the simple number of analysts covering a firm. We find that while analysts in general produce market and industry-level information, high-a...

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Bibliographic Details
Published in:Journal of corporate finance (Amsterdam, Netherlands) Netherlands), 2021-04, Vol.67, p.101803, Article 101803
Main Authors: Dang, Chongyu, Foerster, Stephen, Li, Zhichuan (Frank), Tang, Zhenyang
Format: Article
Language:English
Subjects:
Analyst talent
Earnings announcements
Information asymmetry
Insider trading
Sell-side financial analyst
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Summary:We examine 1984–2018 data and show that the talent or ability of sell-side financial analysts affects a covered firm's information environment—more so than the simple number of analysts covering a firm. We find that while analysts in general produce market and industry-level information, high-ability analysts contribute more firm-specific information. Firms covered by high-ability analysts experience significantly less insider trading prior to positive earnings news. Results only reside in opportunistic (not routine) trades. When an analyst initiates (terminates) coverage we find decreased (increased) subsequent insider trading. Both changes are primarily driven by analyst talent. Analyst ability also negatively relates to insider trading profitability. •We construct a unique measure of analyst talent, by decomposing analyst forecasting performance with the AKM methodology.•This analyst-specific talent is the key to understanding analyst forecasting performance and firm information environment.•High-talent analysts produce significantly more firm-specific information and thus improve firm information environment.•Analyst talent reduces opportunistic insider trading (in both trading frequency and profitability).•The literature should consider analyst quality; focusing on quantity (the number of analyst following) is not sufficient.
ISSN:0929-1199
1872-6313
DOI:10.1016/j.jcorpfin.2020.101803