Analyst Following Along the Supply Chain

This study investigates the determinants and consequences of analysts strategically following the major customers of the firms in their research portfolios. We find that the likelihood of an analyst following a firm's major customers increases with the strength of the economic ties along the supply chain, as measured by the percent of the firm's sales to those customers. This result is consistent with these analysts understanding the informational complementarities between the firm and its customers. Moreover, we show that analysts who follow a firm's major customers incorporate the customers' earnings news into their forecast revisions for the supplier firm, but other analysts do not. In contrast, analysts who do not cover a firm's major customers are slow in responding to revisions in the customers' consensus forecasts. Finally, our evidence suggests that analysts who follow their major customers provide more accurate earnings forecast for the supplier firms, and that the greater forecast accuracy attributed to following a firm's major customers is as large as the effect of following the firm's industry peers.