The effect of industry co-location on analysts' information acquisition costs

We examine how the co-location of firms in the same industry affects analysts' cost of gathering and processing information. We find that when the firms in an analyst's portfolio are located farther away from other firms in the same industry, the analyst's portfolio size is smaller and average forecast accuracy is lower. We further find that the additional costs that analysts incur to follow distant firms are amplified when earnings are more difficult to forecast. Last, we provide some evidence that managers are more knowledgeable about other firms in the same geographic area. Specifically, managers are more likely to reference firms in their industry that are geographically closer during conference calls. This paper provides additional evidence that the co-location of firms in the same industry not only affects operating and strategic decisions (as documented in the existing literature), but also analysts' costs of gathering and analyzing information about the firm.