How Do Experienced Analysts Improve Price Efficiency?
47 Pages Posted: 10 Jun 2014 Last revised: 1 Jul 2017
Date Written: June 30, 2017
We document that the accrual anomaly is smaller for firms followed by experienced analysts, suggesting a positive association between analyst experience and stock price efficiency. We examine two channels through which analyst experience could affect price efficiency: research and monitoring. We find analysts and investors respond more positively to the accrual component of earnings for firms followed by more experienced analysts, consistent with the monitoring channel. We next test whether analyst experience is positively associated with higher quality accruals, consistent with the monitoring story. Using both propensity score matching and the exogenous closure of brokerages to control for potential endogeneity, we find that accrual quality is higher in firms followed by experienced analysts. Our results suggest that improved monitoring of financial reporting by experienced analysts can mitigate accrual mispricing.
Keywords: Financial Analysts, Accrual Anomaly, Experience, Accrual Quality
JEL Classification: G14, G24, J24
Suggested Citation: Suggested Citation