What Drives the Value of Financial Analysts’ Advice? The Role of Earnings and Growth Forecasts

36 Pages Posted: 21 Jun 2021

See all articles by Ohad Kadan

Ohad Kadan

Washington University in St. Louis - John M. Olin Business School

Leonardo Madureira

Case Western Reserve University - Weatherhead School of Management

Rong Wang

Singapore Management University; Singapore Management University - Lee Kong Chian School of Business

Tzachi Zach

Ohio State University (OSU) - Department of Accounting & Management Information Systems

Date Written: May 2021

Abstract

We offer a parsimonious index at the individual analyst level to measure the extent to which an analyst relies on earnings and long-term growth forecasts in her advice. Using this index, we evaluate the contribution of earnings and growth forecasts to the investment value of analysts’ stock recommendations. We find that the fraction of analysts’ advice attributed to forecasts varies considerably across analysts and sectors. The investment value of recommendations is higher for analysts who rely less on their forecasts and more on other sources of information when forming investment advice. Investors recognize the superiority of recommendations from analysts who rely to a larger degree on information not included in forecasts, as stock prices respond more strongly to changes in such recommendations.

Suggested Citation

Kadan, Ohad and Madureira, Leonardo and Wang, Rong and Zach, Tzachi, What Drives the Value of Financial Analysts’ Advice? The Role of Earnings and Growth Forecasts (May 2021). Available at SSRN: https://ssrn.com/abstract=3864432 or http://dx.doi.org/10.2139/ssrn.3864432

Ohad Kadan

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Leonardo Madureira (Contact Author)

Case Western Reserve University - Weatherhead School of Management ( email )

364 PBL Building
Cleveland, OH 44106
United States
216-368-5003 (Phone)

HOME PAGE: http://faculty.weatherhead.case.edu/madureira/

Rong Wang

Singapore Management University ( email )

Li Ka Shing Library
70 Stamford Road
Singapore 178901, 178899
Singapore

Singapore Management University - Lee Kong Chian School of Business ( email )

469 Bukit Timah Road
Singapore 912409
Singapore

Tzachi Zach

Ohio State University (OSU) - Department of Accounting & Management Information Systems ( email )

2100 Neil Avenue
Columbus, OH 43210
United States
614-292-4101 (Phone)

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