How Do Experienced Analysts Improve Price Efficiency?
49 Pages Posted: 10 Jun 2014 Last revised: 8 May 2018
Date Written: April 30, 2018
We document that the accrual anomaly is substantially mitigated for firms followed by more experienced analysts, suggesting that analyst experience improves stock price efficiency. We examine two channels through which analyst experience could affect price efficiency: research and monitoring. Our results are consistent with the monitoring role being the primary mechanism through which experience affects price efficiency. For firms followed by more experienced analysts, we find that analysts and investors respond more positively to the accrual component of earnings, and that accrual quality is higher. The latter result holds after using both propensity score matching and exogenous events of brokerage closures and mergers to control for endogeneity. Finally, our results consistently indicate that only years of experience directly covering the firm matter; experience covering other firms does is not associated with improved price efficiency.
Keywords: Financial Analysts, Accrual Anomaly, Experience, Accrual Quality
JEL Classification: G14, G24, J24
Suggested Citation: Suggested Citation