Determinants of Analyst Skill Specialization

Abstract

This study examines individual analysts' relative strengths in earnings forecasting skill and stock picking skill. We define analysts with skill specialization when he has one skill substantially stronger than the other, and analysts with non-specialization when he has balanced skills. We follow theories on skill specialization in labor market research, and model skill specialization decisions as the optimal outcomes of analysts maximizing their human capital. Our empirical results are consistent with the predictions from the model. We find that an analyst's choice of specialization is negatively related with his brokerage size, brokerage reputation, his all-star status, and the industry skill spillover effect, all of which capture the inverse of his skill development cost. We also find that the economies of scope in skill development, determined by the characteristics of the firms covered by the analyst are negatively related with his choice of skill specialization. Using earnings persistence, earnings predictability, and earnings fixation to measure investors' demand for analysts' earnings forecasting skill, and firms' shareholder base to measure the demand for analysts' stock picking skill, we show that they explain analysts' choices between specializing in forecasting earnings and picking stocks. We also find analysts who specialize in forecasting earnings utilize the skill more intensively by issuing more frequent and more innovative earnings forecast revisions.

Keywords: Analyst, Earnings Forecast, Stock Recommendation, Stock Picking, Analyst Specialization, Skill Specialization

JEL Classification: M41, J22, G29