Does Forecast Accuracy Matter to Security Analysts?

Author:

Mikhail Michael B.1,Walther Beverly R.2,Willis Richard H.3

Affiliation:

1. Massachusetts Institute of Technology.

2. Northwestern University.

3. Duke University.

Abstract

We investigate if earnings forecast accuracy matters to security analysts by examining its association with analyst turnover. Controlling for firm- and time-period effects, forecast horizon and industry forecasting experience, we find that an analyst is more likely to turn over if his forecast accuracy is lower than his peers. We find no association between an analyst's probability of turnover and his absolute forecast accuracy. We also investigate another observable measure of the analyst's performance, the profitability of his stock recommendations. There is no statistical relation between the absolute or relative profitability of an analyst's stock recommendations and his probability of turnover. We interpret our findings as indicating that forecast accuracy is important to analysts.

Publisher

American Accounting Association

Subject

Economics and Econometrics,Finance,Accounting

Reference16 articles.

1. Security analyst superiority relative to univariate time-series models in forecasting quarterly earnings

2. Clement, M. 1998. Analyst forecast accuracy: Do ability, resources, and portfolio complexity matter? Working paper, University of Texas at Austin, TX.

3. Dechow, P., A. Hutton, and R. Sloan. 1997. The relation between analysts' long-term earnings growth forecasts and stock price performance following equity offerings. Working paper, University of Michigan, Ann Arbor, MI and Harvard University, Boston, MA.

4. Dorfman, J. 1991. Analysts devote more time to selling as firms keep scorecard on performance. Wall Street Journal (October 29): C1.

5. Dorfman, J. 1997. For stock-picking, ``New York, New York'' is drowned by regional brokers' chorus. Wall Street Journal (February 12): C1.

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