Measure for Measure: The Relation between Forecast Accuracy and Recommendation Profitability of Analysts

40 Pages Posted: 11 Dec 2007

See all articles by Yonca Ertimur

Yonca Ertimur

University of Colorado at Boulder - Department of Accounting

Jayanthi Sunder

University of Arizona - Eller College of Management

Shyam V. Sunder

University of Arizona - Department of Accounting

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Abstract

We examine the contemporaneous relation between earnings forecast accuracy and recommendation profitability to assess the effectiveness with which analysts translate forecasts into profitable recommendations. We find that, after controlling for expertise, more accurate analysts make more profitable recommendations, albeit only for firms with value-relevant earnings. Next, we show that conflicts of interest from investment banking activities affect the relation between accuracy and profitability. In the case of buy recommendations, more accurate forecasts are associated with more profitable recommendations only for the nonconflicted analysts. For hold recommendations, higher levels of accuracy are associated with higher levels of profitability for conflicted analysts, provided these recommendations are treated as sells. Finally, we find that regulatory reforms aimed at mitigating analyst conflicts of interest appear to have improved the relation between accuracy and profitability. Specifically, the integrity of buy and hold recommendations has improved and the change is more pronounced for analysts expected to be most conflicted.

Suggested Citation

Ertimur, Yonca and Sunder, Jayanthi and Sunder, Shyam, Measure for Measure: The Relation between Forecast Accuracy and Recommendation Profitability of Analysts. Available at SSRN: https://ssrn.com/abstract=1065877 or http://dx.doi.org/10.1111/j.1475-679X.2007.00244.x

Yonca Ertimur (Contact Author)

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

419 UCB
Boulder, CO 80309-0419
United States

Jayanthi Sunder

University of Arizona - Eller College of Management ( email )

School of Accountancy
1130 E Helen St.
Tucson, AZ 85721
United States
520-626-8489 (Phone)

Shyam Sunder

University of Arizona - Department of Accounting ( email )

210 L McClelland Hall
1130 E Helen St
Tucson, AZ 85721
United States

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