Cost Stickiness and Financial Analysts’ Information Environment : An Evidence from the Korean Market

Abstract

[Purpose] This study investigates whether the decline in the forecast accuracy and coverage for sticky firms (Weiss 2010) is due to the analysts’ information environment such as the decrease in reliance on private information. [Methodology] We used Weiss (2010)’s firm－level cost stickiness and Barron et al. (1998)’s precision of analysts’ public and private information, and the consensus, the degree to which analysts rely on public or private information. [Findings] First, we found that sticky cost behavior decreases both public and private information. Besides, sticky cost behavior decreases private information to a more significant extent than public information. Second, we found that forecast errors are reduced for the sticky firms when analysts increase their reliance on private information. Finally, sticky cost behavior increases analysts’ reliance on private information in the next period. [Implications] We believe that our study contributes to the literature because not many studies have investigated the influence of asymmetric cost structure on the analysts’ information set, private and public information. We believe that this study contributes to the understanding of cost stickiness in that we showed the sticky cost’s impact on the information intermediation activities of individual analysts, especially we confirmed that analysts’ private information plays an important role in improving the accuracy of analysts’ earnings forecast for firms with cost stickiness.