Industry Sensitivity to External Forces and the Information Advantage of Analysts over Managers*

This study examines whether analysts have an industry-level information advantage over managers when forecasting earnings. While analysts are often viewed as industry experts, prior research fails to document such an advantage. We predict that analysts' industry-level information advantage is more likely to exist in industries where firm performance is more sensitive to industry-level external economic forces. We find that for such firms, analysts provide relatively more accurate earnings forecasts compared to managers. Consistent with our predictions, we further find that managers of such firms provide fewer and less precise forecasts and that this association is more pronounced in firms with higher analyst following. Collectively, these findings suggest that analysts have an industry-level information advantage over managers when forecasting earnings for firms in industries with high sensitivity to external forces, and that industry sensitivity risk is a distinct industry characteristic that affects firm-level disclosure.