Analysts, Macroeconomic News, and the Benefit of In-House Economists

• In Event: Macroeconomic Effects and Financial Reporting

Abstract

Anecdotal evidence suggests that financial analysts are too optimistic during economic downturns. Examining their earnings research, we verify this contention and demonstrate that analysts under-react to negative macroeconomic news. Importantly, we show that analysts’ forecasts improve with both the availability and the quality of an active in-house macroeconomist. In addition, analysts who are more experienced or more focused (i.e., cover fewer firms), or follow smaller firms or more cyclical firms/industries benefit more from an in-house economist. Investors recognize the benefit of access to an in-house economist and react more strongly to forecast revisions of analysts with such access. Overall, our results suggest that the presence of an in-house macroeconomist improves the efficiency and credibility of analyst research, which subsequently makes market prices more efficient.

Authors

• Artur Hugon, Arizona State University

• Alok Kumar, University of Miami

• An-Ping Lin, Arizona State University