Analysts' Technological Expertise

Abstract

While a firm’s success increasingly relies on technological innovation, little is known, however, about whether and how analysts utilize information about a firm’s technological innovation for their information production. We construct technological expertise for each analyst-firm pair based on the technological proximity between the firm and other firms covered by the analyst. We find that technological expertise increases the likelihood and timeliness for analysts to cover a firm. It also increases their earnings forecast accuracy and recommendation profitability, especially for firms with more intensive research activities and greater growth opportunities. Technological expertise is distinct from industry specialization, and could substitute industry specialization in analysts’ coverage decisions. Our findings suggest that technological expertise is an important analyst trait that affects analysts’ coverage decisions and forecast performance.

Keywords: Technological expertise, patents, analyst coverage, forecast accuracy, recommendation profitability, timeliness, commonality, industry specialization

JEL Classification: G14, M40, M41