Expertise and Incorporation of Public Information


Speaker


Abstract

This study decomposes public information into market-level news, industry-level
news and firm-specific news. The results show that analysts only underreact to firm-specific
news, whereas managers underreact more to industry-level news than to firm-specific news.
We further find that the degree of difficulty in gaining expertise affects the extent of
underreaction. More specifically, analysts underreact more to firm-specific news when they
follow more firms or face more uncertain firm information. Managers underreact less to
industry-level news when they are leaders in that industry. Next, we study the information
interaction process between analysts and managers and find that analysts incorporate more
firm-specific news into their earnings forecasts after management guidance. Finally, we find
that investors are more responsive to new information contained in management forecast
news than to prior information.
 
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Paolo Perego

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