The Effects of Analysts’ Access to Management’s Private Information and the Precision of Publicly Available Information on Analyst Forecast Accuracy

Abstract:     
In this paper, we find that the importance of analyst and forecast characteristics for analyst forecast accuracy varies with analysts’ access to management’s private information and with the precision of publicly available information. In particular, we find a decrease in the importance of experience, effort, brokerage house size, forecast horizon, and forecast boldness following the enactment of Regulation Fair Disclosure (Reg FD), especially when the precision of publicly available information is low. In addition, analysts with more experience do not maintain their superior forecast accuracy and analysts employed by large brokerage houses perform even worse than other analysts post-Reg FD, suggesting that the positive effects of experience and brokerage house size for forecast accuracy observed pre-Reg FD were due to the information advantage these analysts enjoyed, rather than their ability to generate private information. Finally, following the enactment of Reg FD, the importance of prior forecast accuracy for analyst forecast accuracy increases and prior forecast accuracy replaces forecast horizon as the most important factor. The effect of prior forecast accuracy is even greater when the precision of publicly available information is low, suggesting that prior forecast accuracy is related to analysts’ ability to generate their own private information. Because prior evidence suggests that investors consider analyst and forecast characteristics when they evaluate the relevance of analyst forecasts, our findings can help investors to better assess and use the information in analyst forecasts.

Number of Pages in PDF File: 44

Keywords: Analyst forecast errors, analyst disagreement, information uncertainty, private information

JEL Classification: M40, M41

working papers series