“Analyst Information Discovery and Information Interpretation Roles: A Topic Modeling Approach” by Dr. Allen HUANG
Dr. Allen HUANG
Assistant Professor of Accounting
HKUST Business School
The Hong Kong University of Science and Technology
Existing literature suggests that information discovery and information interpretation are two important sources of analyst value, but has yet to identify each role explicitly. In this study, we employ an advanced topic modeling methodology from computational linguistic research to compare and contrast the thematic content of a large sample of analyst reports issued promptly after the earnings conference calls to that of the conference calls. This methodology allows us to explicitly identify and empirically quantify the amount of analyst efforts devoted to discovering information beyond the existing disclosure and that to interpreting the existing disclosure. Consistent with information discovery, we document that promptly-issued analyst reports contain a significant amount of discussion on exclusive topics that were not referred to in the conference calls. 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. Moreover, we find that investors value both analysts’ information discovery and interpretation roles immediately after the call. Cross-sectionally, we document evidence that analysts respond to investor demand for their services by playing a greater information discovery role when managers are more likely to withhold information and providing more interpretation when the processing cost of the information in conference calls is high.