Do Analysts Incorporate Market/Industry-Wide or Firm-Specific Information into Stock Price: Some Evidence on the Role of Earnings Quality

Motivated by recent controversies on the information role of financial analysts, this study examines whether firm level transparency proxied by accounting quality affects the mix of market/industry-wide vs. firm-specific information provided by analysts. Specifically, we show that better earnings quality encourages analysts to incorporate more firm-specific information into stock price, which leads to reduced stock price synchronicity. In addition, we find that only non-industry specialist analysts are likely to be encouraged by better earnings quality to incorporate more firm-specific information, suggesting that industry specialists have information advantage from covering different firms in one industry and are less likely to be affected by the disclosure quality of a single firm. Together, these results suggest that analysts take into consideration the cost and benefit of providing firm-specific information in determining the mix of information they help to disseminate to the capital market.