How to Measure Analyst Forecast Effort
30 Pages Posted: 19 Mar 2014
Date Written: March 18, 2014
We introduce a new way to measure the forecast effort that analysts devote to their earnings forecasts by measuring the analyst’s general effort for all covered firms. While the commonly applied effort measure is based on analyst behavior for one firm, our measure considers analyst behavior for all covered firms. Our general effort measure captures additional information about analyst effort and thus can identify accurate forecasts. We emphasize the importance of investigating analyst behavior in a larger context and argue that analysts who generally devote substantial forecast effort are also likely to devote substantial effort to a specific firm, even if this effort might not be captured by a firm-specific measure. Empirical results reveal that analysts who devote higher general forecast effort issue more accurate forecasts. Additional investigations show that analysts’ career prospects improve with higher general forecast effort. Our measure improves on existing methods as it has higher explanatory power regarding differences in forecast accuracy than the commonly applied effort measure. Additionally, it can address research questions that cannot be examined with a firm-specific measure. It provides a simple but comprehensive way to identify accurate analysts.
Keywords: Financial analysts, Earnings forecasts, Forecast accuracy, Forecast effort
JEL Classification: G24, G29, M41
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