Information externalities, analyst research resource allocation, and stock pricing efficiency

Information is key to decision-making and is a major determinant of investment performance. We hypothesise that as analysts are constrained by their research resources, they collect information with more externalities. Measuring information externalities as a stock’s fundamental correlations with other stocks in the same industry, we find that stocks with high information externalities get more analyst coverage, more (high-quality) analyst reports, and more site visits than those with low information externalities. At the analyst level, we find consistent evidence that individual analysts allocate more effort to firms with high information externalities in their stock portfolios. Consequently, we further demonstrate that stocks with high information externalities are associated with less information delay and are priced more efficiently.