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The Use of Earnings Forecasts in Stock Recommendations: Are Accurate Analysts More Consistent?

Journal of Business Finance & Accounting, Forthcoming

42 Pages Posted: 18 Sep 2008 Last revised: 13 Sep 2010

Andreas Simon

Pepperdine University - Graziadio School of Business and Management

Asher Curtis

University of Washington

Multiple version iconThere are 2 versions of this paper

Date Written: September 1, 2010

Abstract

We examine how analysts’ incentives to build their reputation through accurate forecasting changes the relative association between analyst recommendations and rigorous valuation models versus valuation heuristics. Controlling for the firm-specific difficulty of valuation, we show that the recommendations of the most accurate forecasters within each industry have a significantly higher correlation with rigorous valuation models and a significantly lower correlation with valuation heuristics than their less accurate peers. Our results are robust to potentially confounding firm-specific effects using a within-firm sample design, a changes analysis, and for short-term, long-term and combined measures of forecast accuracy. Consistent with reputation building, we find that the recommendations of “All-Star” analysts and accurate forecasters have similar associations on rigorous and heuristic valuation approaches. Our results are consistent with the incentive to build a good reputation mitigating the influence of factors other than identifying mispriced securities, using fundamental analysis, on stock recommendations.

Keywords: Forecast accuracy, Fundamental valuation, Stock recommendations, Analyst reputation

JEL Classification: G12, G14, G29, M41

Suggested Citation

Simon, Andreas and Curtis, Asher, The Use of Earnings Forecasts in Stock Recommendations: Are Accurate Analysts More Consistent? (September 1, 2010). Journal of Business Finance & Accounting, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1270147

Andreas Simon (Contact Author)

Pepperdine University - Graziadio School of Business and Management ( email )

Malibu, CA
United States

Asher Curtis

University of Washington ( email )

Seattle, WA 98195
United States

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