The Effect of Experience on Security Analyst Underreaction

Abstract

We examine if analysts more fully incorporate prior earnings and returns information in their current quarter forecasts as their experience following a firm increases. We measure analyst firm-specific forecasting experience as the number of prior quarters for which the analyst has issued an earnings forecast for the firm. We find that analysts underreact to prior earnings information less as their experience increases, suggesting one reason why analysts become more accurate with experience.

Keywords: underreaction, experience, earnings forecasts, security analysts

JEL Classification: M41, G14, G29