Abstract

http://ssrn.com/abstract=988112
 
 

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Is Analyst Earnings Forecast Ability Only Firm-Specific?


Lawrence D. Brown


Temple University - Department of Accounting

Emad Mohammad


McMaster University - Accounting & Financial Management Services

May 1, 2007


Abstract:     
The state of the art in the analyst forecasting literature is that earnings forecast ability is firm-specific (Chen, Francis, and Jiang 2005; Chen and Jiang 2006). This view is based on Park and Stice (2000)'s finding of the absence of a spillover effect; i.e., when reacting to analyst forecast revisions of firm j, investors ignore analyst forecast ability with respect to firm k. We provide an economic rationale for the absence of a spillover effect. We demonstrate that firm-specific ability is far more important than the spillover effect for the purpose of distinguishing between superior and inferior analysts in holdout periods, suggesting that investors are rational to pay little heed to this effect. We examine the issue of whether analyst earnings forecast ability is firm specific by introducing a general ability effect, defined as analyst accuracy for all the other firms s/he follows. We show that general ability is far more important than firm-specific ability for the purpose of distinguishing between superior and inferior analysts in holdout periods. We also document that investors are rational with respect to general ability; when reacting to analyst forecast revisions, they pay more attention to general ability than to firm-specific ability. We conclude that analyst earnings forecast ability is not firm-specific and that investors are rational regarding the relative attention they pay to general ability (much), firm-specific ability (some) and the spillover effect (none).

Number of Pages in PDF File: 35

Keywords: forecast accuracy, analysts, firm-specific ability, general ability, spillover

JEL Classification: M41, G14, G29, A10

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Date posted: May 23, 2007 ; Last revised: April 1, 2014

Suggested Citation

Brown, Lawrence D. and Mohammad, Emad, Is Analyst Earnings Forecast Ability Only Firm-Specific? (May 1, 2007). Available at SSRN: http://ssrn.com/abstract=988112 or http://dx.doi.org/10.2139/ssrn.988112

Contact Information

Lawrence D. Brown (Contact Author)
Temple University - Department of Accounting ( email )
Philadelphia, PA 19122
United States

Emad Mohammad
McMaster University - Accounting & Financial Management Services ( email )
1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada
905-525-9140 ext. 27432 (Phone)
905-521-8995 (Fax)
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