Do Non-Investment Bank Analysts Make Better Earnings Forecasts?

Posted: 4 Dec 2007 Last revised: 17 Jul 2008

See all articles by John Jacob

John Jacob

University of Colorado at Boulder - Department of Accounting

Steve Rock

University of Colorado at Boulder - Department of Accounting

David P. Weber

University of Connecticut - Department of Accounting

Abstract

This study compares the earnings forecasts of analysts employed by investment banks to those employed by firms not involved in investment banking. We discuss possible resource and informational advantages for investment bank analysts, and conflicts of interest faced by both groups, suggesting that, despite incentives stemming from corporate financing operations, investment bank analysts may nevertheless provide superior forecasts. We also compare forecast accuracy and relative optimism within investment bank analysts between affiliated and unaffiliated analysts. Our results indicate that, controlling for relevant factors identified in prior research, investment bank analysts forecasts are on average more accurate than forecasts made by other analysts. Among investment bank analysts, affiliated analysts issue more accurate forecasts than unaffiliated analysts. Further analyzes reveal evidence consistent with the employment of higher-quality analysts and additional resources contributing to, but not completely explaining, the relation between forecast accuracy and investment banking and also with investment-banking affiliations conferring informational advantages. Regarding alleged biases caused by conflicts of interest, we find that investment bank analysts forecasts are less optimistic than those of their non-investment bank counterparts. We discuss implications of our results for the Global Settlement brokered by NYSAG Elliott Spitzer, the SEC and ten large investment banks.

Keywords: Financial analysts, conflicts of interest, earnings forecasts, forecast accuracy

JEL Classification: M41, G24, G29, C53

Suggested Citation

Jacob, John and Rock, Steven Karl and Weber, David P., Do Non-Investment Bank Analysts Make Better Earnings Forecasts?. Journal of Accounting, Auditing and Finance, Vol. 23 No. 1, Winter 2008. Available at SSRN: https://ssrn.com/abstract=1051321

John Jacob

University of Colorado at Boulder - Department of Accounting ( email )

419 UCB
Boulder, CO 80309-0419
United States
303-735-6335 (Phone)

Steven Karl Rock (Contact Author)

University of Colorado at Boulder - Department of Accounting ( email )

419 UCB
Boulder, CO 80309-0419
United States
303-735-5009 (Phone)
303-492-5962 (Fax)

David P. Weber

University of Connecticut - Department of Accounting ( email )

School of Business
Storrs, CT 06269-2041
United States

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