Before an Analyst Becomes an Analyst: Does Industry Experience Matter?

Abstract

Using hand-collected biographical information on financial analysts from 1983 to 2011, we find that analysts making forecasts on firms in industries related to their pre-analyst experience have better forecast accuracy, evoke stronger market reactions to earning revisions, and are more likely to be named Institutional Investor all-stars. Exogenous losses of analysts with related industry experience have real financial market implications — changes in firms’ information asymmetry and price reactions are significantly larger compared to other analysts. Overall, industry expertise acquired from pre-analyst work experience is valuable to analysts consistent with the emphasis placed on their industry knowledge by institutional investors.

Keywords: Analyst forecasts, industry knowledge, all-star analysts

JEL Classification: G20, G23