Do Analysts at Independent Research Firms Make Better Earnings Forecasts?

46 Pages Posted: 10 Sep 2003

See all articles by John Jacob

John Jacob

University of Colorado at Boulder - Department of Accounting

Steve Rock

University of Colorado at Boulder - Department of Accounting

David P. Weber

University of Connecticut - Department of Accounting

Date Written: July 2003

Abstract

This study compares the earnings forecasts of analysts employed by independent research firms to those of analysts employed by investment banks along the dimensions of accuracy and optimism. We discuss the conflicts of interest faced by both groups and suggest that, despite incentives stemming from corporate financing operations, investment bank analysts may nevertheless provide superior forecasts. We provide evidence on this empirical question using a sample of analyst forecasts from 1998-2001. Our results reveal that short-term forecasts made by investment bank analysts are on average more accurate and less optimistic than those from analysts employed by independent research firms. Our results are robust to controlling for several relevant factors identified in prior research and are consistent across both annual and quarterly earnings forecasts. We also examine the optimism in long-term earnings growth forecasts and fail to find a significant difference between the two groups.

Keywords: financial analysts, forecast accuracy, earnings forecasts, forecast optimism, investment banks, independent research firms

JEL Classification: G14, G24, G29, M41, J44

Suggested Citation

Jacob, John and Rock, Steven Karl and Weber, David P., Do Analysts at Independent Research Firms Make Better Earnings Forecasts? (July 2003). Available at SSRN: https://ssrn.com/abstract=434702 or http://dx.doi.org/10.2139/ssrn.434702

John Jacob (Contact Author)

University of Colorado at Boulder - Department of Accounting ( email )

419 UCB
Boulder, CO 80309-0419
United States
303-735-6335 (Phone)

Steven Karl Rock

University of Colorado at Boulder - Department of Accounting ( email )

419 UCB
Boulder, CO 80309-0419
United States
303-735-5009 (Phone)
303-492-5962 (Fax)

David P. Weber

University of Connecticut - Department of Accounting ( email )

School of Business
Storrs, CT 06269-2041
United States

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