Diligence, Objectivity, Quality, and Accuracy

Abstract

We develop indices of diligence, objectivity, and quality by an analyst-analyst-firm, and relate them to accuracy of its forecasts. Public versus Non-Public Models provides index of diligence, which equals one minus p-value of Hausman Specification Test of Ordinary Least Squares versus Two Stage Least Squares. Objectivity versus Non-Objectivity Models provides index of objectivity, which equals p-value of Wald Test of zero coefficients versus non-zero coefficients in 2SLS regression of earnings forecast residual. Exponent of negative of standard deviation of residuals of analyst forecast regression equation provides index of analytical quality. We find that accuracy is statistically and economically significant increasing function of product of diligence, objectivity, and quality. We find that associations of diligence, objectivity, quality, and accuracy, with time and Nasdaq listing are not economically significant, which has policy implications.

Keywords: Asymmetric Information; Analyst Forecasts; Management Guidance; Earnings; Diligence; Objectivity; Quality; Hausman Specification Test; Wald Test; Accuracy.

JEL Classification: G12; G14; G24; C23; C26; M41.