Analysts' Disclosures of Non-Fundamental Information

Existing studies document that analysts' opinions (e.g., recommendations or target prices) are informative on stock returns, even after controlling for accounting forecasts and despite relatively short forecasting horizons. This paper argues that sell-side analysts may acquire incidental information about the order flow that is related to short-term price movements, but unrelated to underlying firm value. We examine the optimal disclosure and pricing of this non-fundamental or demand-based information. Whereas a risk-neutral agent would never disclose value-relevant (fundamental) information, a risk-neutral analyst will disclose non-fundamental information; the more precise the information, the more widely it is released. The reason for this result is that disclosing information increases competition for the order flow and leads to higher price sensitivity: this in turn increases the value of the non-fundamental information at the expense of the value of the fundamental information. In the limit, a nearly perfectly precise non-fundamental information is released to an arbitrarily large number of investors for an arbitrarily low fee (i.e., almost-public disclosure). Further, analysts' reports are informative on stock movements, even though they do not contain information about long-term cash flows; specifically, we find that, in equilibrium, disclosure by analysts of this non-fundamental information does not contribute to greater price efficiency unlike disclosures of fundamental information.