A Thematic Analysis of Analyst Information Discovery and Information Interpretation Roles

Evidence in extant literature on the information interpretation and information discovery roles of sell side analysts is inconclusive. While studies in this literature employ different research designs and sample periods, they uniformly rely on equity market reaction to capture the analyst information role. Because equity market reaction may be incomplete or confounded by the simultaneous release of other information (e.g., earnings release and conference calls), this design choice may have hindered researchers’ ability to identify the precise information role analyst play in the capital market. In this study, we introduce novel measures of analyst information discovery and information interpretation that are based on the thematic content of a large sample of analyst reports. These measures allow us to explicitly identify and empirically quantify the amount of information analysts discover and interpret in their reports, without referencing to the equity market reaction. Consistent with information discovery, we document that analyst reports issued promptly after conference calls contain a significant amount of discussion on exclusive topics that were not referred to in the conference calls. Moreover, when analysts do discuss the topics covered in the conference call, they frequently use a different vocabulary from that used by managers, consistent with their information interpretation role. Cross-sectionally, we document evidence that analysts not only respond to investor demand for their services and play a greater information discovery role when firms’ proprietary cost is high, but also provide more interpretation when the processing cost of the information in conference calls is high. Finally, we show that investors value both the information interpretation as well as the information discovery role played by analysts.