Should Investors Trust Equity Analysts?

Abstract

This paper studies the holistic issue of the combination of analyst projection accuracy, diversity, and distribution. It first tracks the earnings per share and sales projections of a number of equity analysts for 17 representative U.S. companies using data from 1978 to 2012. It also compares the analysts' consensus of earnings per share, sales, rating, and price target zone to identify the degree of concentration among the opinions. It finds that the magnitudes and coefficient variations of projection errors are small, and the analysts' opinions are insignificantly diversified. Analysts' projections are not significantly skewed, but pessimistic opinions dominate. The results suggest that the projections issued by equity analysts are generally precise, and following their opinions is technically feasible. Analysts' mistakes are more due to inappropriate investment timing and less due to their abilities to pick firms with robust future performance.