Is Analyst Earnings Forecast Ability Only Firm-Specific?

Abstract:     
The state of the art in the analyst forecasting literature is that analyst earnings forecast ability is only firm-specific (Chen, Francis, and Jiang (2005); Chen and Jiang (2006)). This view is based on Park and Stice’s (2000) finding of the absence of a “spillover” effect, i.e., investors do not consider an analyst’s earnings forecast ability regarding firm k when reacting to his earnings forecast revision for firm j. We re-examine the issue of whether or not earnings forecast ability is only firm-specific by introducing a broad measure of general ability defined as earnings forecast ability for all other firms the analyst follows. We show that a broad measure of general ability is incremental to firm-specific ability both for explaining earnings forecast accuracy in holdout periods and investor reactions to earnings forecast revisions. Our findings suggest that earnings forecast ability has a general aspect incremental to its firm-specific aspect.

Keywords: financial analysts, firm-specific forecast ability, general forecast ability, earnings forecast revisions, market reaction

JEL Classification: M43, J33, M41

Accepted Paper Series