Core Specialization, Forecast Accuracy, and the Market for International Analysts

56 Pages Posted: 20 Mar 2008

See all articles by Omesh Kini

Omesh Kini

Georgia State University

Shehzad L. Mian

Emory University - Department of Finance

Michael J. Rebello

University of Texas at Dallas - Naveen Jindal School of Management

Anand Venkateswaran

Northeastern University - Finance and Insurance Area

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Date Written: March 2008

Abstract

We investigate the relation between core specialization, earnings forecast accuracy, and the employment prospects of international equity analysts over the period 1996-2002. Specifically, we address the following issues: (1) Are analyst earnings forecasts more accurate for core stocks than for non-core stocks? (2) How is an analyst's forecast accuracy for core stocks affected by the inclusion of non-core stocks in her research portfolio? (3) Is there a relation between the size of the core and an analyst's overall accuracy, accuracy in core stocks, and accuracy in non-core stocks? (4) Does the market for analysts draw a distinction between performance in the core and non-core in making the job promotion (separation) decision? Seeking answers to these questions is important because the manner in which analyst research coverage is organized by brokerages has implications for the efficiency of information production in the economy.

Our analysis suggests that forecast accuracy varies systematically across components of analysts' research portfolios, and some of this variation is attributable to the manner in which analysts are evaluated by the market for international analysts. Analysts who diversify their portfolios benefit from information spillovers that flow from core to non-core stocks, and may enjoy economies of scale in information production in the coverage of core stocks. Our evidence is also consistent with analysts focusing their coverage on the country-sector for which they have the greatest aptitude in researching stocks. Due to these influences, analysts produce the most accurate forecast when their portfolios are slightly diversified. While the extant literature focuses on the determinants of overall forecast accuracy, the novel aspect of our study is that it examines how forecast accuracy varies across components of analysts' research portfolios.

Keywords: Core specialization, Analysts┬┐ forecast accuracy, Market for international analysts

JEL Classification: G15, G24, J44

Suggested Citation

Kini, Omesh and Mian, Shehzad L. and Rebello, Michael J. and Venkateswaran, Anand, Core Specialization, Forecast Accuracy, and the Market for International Analysts (March 2008). Available at SSRN: https://ssrn.com/abstract=1107344 or http://dx.doi.org/10.2139/ssrn.1107344

Omesh Kini

Georgia State University ( email )

University Plaza
Atlanta, GA 30303-3083
United States
404-651-2656 (Phone)

Shehzad L. Mian

Emory University - Department of Finance ( email )

Atlanta, GA 30322-2710
United States
404-727-2755 (Phone)
404-727-6313 (Fax)

Michael J. Rebello

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

Anand Venkateswaran

Northeastern University - Finance and Insurance Area ( email )

Boston, MA 02115
United States

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