When Attention Is Away, Analysts Misplay: Distraction and Analyst Forecast Performance

The authors construct a distraction measure based on extreme industry returns to gauge whether analysts’ attention is away from certain stocks under coverage. The authors find that temporarily distracted analysts make less accurate forecasts, revise forecasts less frequently, and publish less informative forecast revisions, relative to undistracted analysts. Further, at the firm level, analyst distraction carries real negative externalities by increasing information asymmetry for stocks that suffer from a larger extent of analyst distraction during a given quarter. The authors' findings thus augment their understanding of the determinants and effects of analyst effort allocation and broaden the literature on distraction and information spillover in financial markets.