A Simultaneous Equations Analysis of Forecast Accuracy, Analyst Following, and Trading Volume

Posted: 15 Nov 1999  

Andrew W. Alford

Goldman, Sachs & Co.

Philip G. Berger

University of Chicago - Booth School of Business

Abstract

We use a simultaneous equations model to study forecast accuracy, analyst following, and trading volume. Forecast accuracy and analyst following are determined simultaneously, with greater accuracy associated with higher following. This result supports the idea that an analyst?s private information complements, rather than substitutes for, factors that increase certainty about the firm?s prospects. Stocks generating more trading volume (and thus greater brokerage commissions) have higher analyst following. Given the simultaneity we document between accuracy and following, stocks that generate greater brokerage commissions not only directly induce higher analyst following but also indirectly enhance the accuracy of earnings forecasts about their firms. Finally, special items and a broad accounting-based signal of change impair analysts? ability to predict future earnings. The negative effect of special items on accuracy is consistent with concerns raised by standard setters that unusual events impair investors? ability to interpret future earnings.

JEL Classification: G12, G29, D82, M41, M44

Suggested Citation

Alford , Andrew W. and Berger, Philip G., A Simultaneous Equations Analysis of Forecast Accuracy, Analyst Following, and Trading Volume. Journal of Accounting, Auditing & Finance, Vol 14, No 3 (New Series), Summer 1999. Available at SSRN: https://ssrn.com/abstract=186169

Andrew W. Alford

Goldman, Sachs & Co. ( email )

85 Broad Street
New York, NY 10004
United States
212-902-0867 (Phone)
212-357-6563 (Fax)

Philip G. Berger (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-834-8687 (Phone)
773-834-4585 (Fax)

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