Analyst Effort Allocation and Firms’ Information Environment

Rong Wang, is an Associate Professor at Lee Kong Chian School of Business, Singapore Management University. She holds Ph.D. Finance from Washington University in St.Louis, USA. Her research interests include Empirical Corporate Finance, Corporate Cash Holdings, Financial Analysts, Executive Compensation. She has been publishing research articles in journals like: Journal of Finance, Journal of Accounting and Economics, Review of Financial Studies, among others. 

We examine how sell-side analysts allocate their effort among firms in their research portfolios and the consequences of their effort allocation decisions. We show that analysts play favorites among portfolio firms by devoting more effort to firms that are relatively more important for their career concerns. Specifically, controlling for analyst and firm characteristics, we find that within each analyst’s portfolio, firms ranked relatively higher based on market capitalization, trading volume, or institutional ownership receive more accurate, frequent, and informative earnings forecast revisions and stock recommendation changes that contain greater information content. As a result, even with explicit controls for firm characteristics, firms whose relative rank based on these dimensions is high in more analysts’ portfolios display less information asymmetry and have higher stock market liquidity and lower costs of capital. Moreover, we find that analysts who engage in a greater extent of career concerns-driven effort allocation are more likely to experience favorable career outcomes.