Individual differences and analyst forecast accuracy
Abstract
Purpose
The purpose of this study is to examine the impact of unidentifiable individual differences among financial analysts on the cross section of their earnings forecast accuracy.
Design/methodology/approach
The paper employs the concept of analyst fixed effects to control for unidentifiable individual differences. Various psychological factors, such as decision style and personality traits, are documented to impact individuals' decision making. However, analysts' individual differences in such psychological factors are not captured by identifiable personal attributes employed in finance literature, such as years of experience. The methodology used addresses this issue and presents a more comprehensive study of analyst forecast accuracy.
Findings
The paper documents that unidentifiable analyst‐specific effects are significant, and that controlling for them improves model fitting and changes the explanatory power of some of the traditionally used independent variables in the literature. The paper confirms that the analyst's firm‐specific experience, the intensity of following that a firm receives, and the forecast horizon are all significantly and consistently related to forecast accuracy. However, it is found that analyst general experience and coverage complexity lose explanatory power when individual differences are controlled for. Analyst general experience is not monotonically associated with better accuracy and that analysts only benefit from increased general experience during the early to middle stages of their career. Finally, when analysts' individual differences are controlled for, the boldness of a forecast revision is not associated with the improvement of accuracy.
Research limitations/implications
The documented non‐monotonic relationship between analyst general experience and forecast accuracy is explained as a result of U‐shaped self‐efficacy, decision style and career concerns. This observation is not necessarily in line with the theory of analyst seniority and reputation‐related performance.
Originality/value
The methodology used addresses the issue of analysts' individual differences in psychological factors and presents a more comprehensive study of analyst forecast accuracy.
Keywords
Citation
Luo, T. and Xie, W. (2012), "Individual differences and analyst forecast accuracy", Review of Accounting and Finance, Vol. 11 No. 3, pp. 257-278. https://doi.org/10.1108/14757701211252582
Publisher
:Emerald Group Publishing Limited
Copyright © 2012, Emerald Group Publishing Limited