The information externality of paid analysts

Using a hand-collected dataset of paid analysts and their earnings forecasts, this study examines the role of paid analysts in capital markets. Paid analysts tend to make more accurate earnings forecasts for the industry counterparts of their paying companies, compared with their non-industry counterparts after they are paid for providing forecasting services. The positive effect of appointing a paid analyst on earnings forecast accuracy for non-paying companies in the same industry (relative to those not in the same industry) is stronger when the paying companies have a weaker information environment and for analysts who have less industry-specific knowledge. Together, the findings of this study support the conjecture that having access to the private information of paying companies creates a positive information externality that enhances paid analysts' earnings forecasting performance for non-paying companies.