Corporate Disclosure Quality and Properties of Analysts' Information Environment

Abstract

This study examines how the quality of corporate disclosures impacts the precision of information that financial analysts incorporate into their forecasts of annual earnings. Our empirical measures distinguish between individual analysts' common and idiosyncratic (uniquely private) information precision, and between the quality of firms' public disclosures and the quality of their private communications with analysts. We find that higher quality disclosures increase the precision of analysts' common and idiosyncratic information. Further, we find that the increased precision of analysts' idiosyncratic information is due to higher quality annual and quarterly disclosures, primarily accounting-related disclosures, publicly available to all investors. These results suggest that higher quality public information better enables analysts to generate idiosyncratic insights. We find no evidence to suggest that the quality of analysts' private communications with management impacts analysts' information precision after controlling for the quality of publicly available accounting information. In sum, the results suggest analysts rely more heavily upon publicly available financial data rather than privileged communications with management in forming their annual earnings forecasts.

Keywords: disclosure quality, analysts' forecasts, common information, idiosyncratic information, BKLS model

JEL Classification: M41, M45, G10, G29