Discussion of Do Security Analysts Improve Their Performance with Experience?

Analysts' use of earnings forecasts in predicting stock returns: Forecast horizon effects

The market reaction to analyst stock recommendation and earnings forecast consistency: International evidence

How Do Analysts Use Their Earnings Forecasts in Generating Stock Recommendations?

The quality of securities firms' earnings forecasts and stock recommendations: Do informational advantages, reputation and experience matter in China?

A recent Journal of Applied Business Research article by Sheikholesami, Wilson and Slevin (1998) examined the accuracy of security analysts' earnings forecasts for CEO change firms relative to a control group.  The authors applied ANOVA on Value Line percentage forecast error measures and found "marginally significant" results indicating "that precision improved more for CEO change firms than for control firms."  Doran (1998) tests for superior methods when scrutinizing forecast error.  He finds percentage forecast error data to be severely non-normal, and demonstrates that nonparametric tests based upon ranks are superior to parametric methods.  If analysts' earnings forecast precision actually improves more for CEO change firms, test results should be stronger using rank values instead of discrete percentage error measures.

Keeping an Eye on the Competition Observational Learning in Analysts’ Forecasts

Do Managers' Accrual Decisions Speak Louder Than Words?

Several theories of reputation and herd behavior (e.g., Scharfstein and Stein (1990) and Zweibel (1995)) suggest that herding among agents should vary with career concerns. Our goal is to document whether such a link exists in the labor market for security analysts. We find that inexperienced analysts are more likely to be terminated for inaccurate earnings forecasts than are their more experienced counterparts. Controlling for forecast accuracy, they are also more likely to be terminated for bold forecasts that deviate from the consensus. Consistent with these implicit incentives, we find that inexperienced analysts deviate less from consensus forecasts. Additionally, inexperienced analysts are less likely to issue timely forecasts, and they revise their forecasts more frequently. These findings are broadly consistent with existing career concern motivated herding theories.

Valuation Implications of Revenue Forecasts

Reading between the lines: An empirical examination of qualitative attributes of financial analysts’ reports

International Evidence on Analyst Stock Recommendations, Valuations, and Returns

This study examines the information content and informational efficiency of consensus analysts' forecasts in an Australian setting. Consistent with Lys and Sohn (1990) and Abarbanell (1991), analysts' forecasts were found to possess information content but did not incorporate all publicly available information. The empirical analysis in this paper suggests that negative security returns are associated with higher forecast errors. This contrasts with the results of Lys and Sohn (1990) and is consistent with a positive bias in forecasts. However, this did not preclude analysts' forecasts from being viable proxies for the market's expectations of future earnings.

Measuring the Career Concerns of Security Analysts: Job Separations, Stock Coverage Assignments and Brokerage House Status

A Re-Examination of the Importance of Analyst and Forecast Characteristics for Forecast Accuracy: The Effects of Analyst Disagreement, Stale Forecasts, and the Information Environment

The general theme of examining components of earnings is of interest to both practitioners and academics, given its potential for allowing investors and analysts to more precisely forecast earnings and estimate firm value. For U.S. multinational firms, prior research indicates that while the foreign and domestic earnings components are value relevant, the market fails to fully incorporate the higher persistence of foreign earnings. However, findings of potential market mispricing can be attributed to alternative explanations such as unidentified risk factors or flaws in research design. In this study, we seek to circumvent these concerns by examining whether financial analysts (who are deemed to be sophisticated users of financial statements and act as intermediaries between companies and investors) fully incorporate the time-series properties of foreign and domestic earnings in formulating their earnings forecasts. Similar to market-based studies, we find that analysts do distinguish between foreign and domestic earnings. However, we find that analysts also fail to fully incorporate the higher persistence of foreign earnings. Finally, we find that analysts' underestimation of foreign earnings persistence appears to parallel the similar finding at the market level. We discuss how our findings relate to the prior literature, and what they imply for accounting research and practice. Specifically, our study complements previous research which appears to undermine the notion of an efficient market. Also, we find that analysts' bias is in the direction of lowering earnings expectations by underestimating the persistence of foreign earnings, which suggests that collusion with management to inflate earnings expectations is not a plausible explanation for the bias. Collectively, our findings suggest analysts' lack of effectiveness as information intermediaries.