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Review of Accounting Studies (2014)
We document that the likelihood of an analyst following a supplier-customer firm pair increases with the strength of the economic ties along the supply chain, as measured by the percent of the supplier’s sales to the customer. Analysts who follow a covered firm’s customer provide more accurate earnings forecasts for the supplier firm than analysts who do not. The greater forecast accuracy attributed to following a supplier’s customer is as large as the effect of following the supplier’s industry peers. While both types of analysts respond to and incorporate the earnings news from the customer firm into their revision of the supplier’s earnings forecasts, we find no evidence that analysts who follow the supplier-customer pair do so at a greater extent than their counterparts. However, these supplier-customer analysts exhibit a larger improvement in their forecast accuracy for the supplier subsequent to the customer’s earnings announcements, when compared to other analysts. Overall, the evidence suggests that supplier-customer analysts benefit from the informational complementarities along the supply chain and improve their forecast accuracy as a result.