Experience, Expertise and the Forecasting Performance of Security Analysts

Abstract

We examine the ongoing performance of forecast analysts who change their brokerage affiliation and/or the companies they follow. On average, analysts who leave a brokerage house exhibit a decline in the forecast accuracy relative to all other analysts who follow the same company(s) as they approach the replacement date. Analysts joining a new brokerage house and/or follow new companies, however, do not become more accurate as they gain experience. This result is consistent with our finding of commonalities in analysts' performance across all the companies they follow, suggesting differential levels of innate or native abilities among analysts. The results also indicate that situational factors such as brokerage size and industry specialization by the brokerage have a positive impact on forecast accuracy. For example, large brokerage houses tend to be associated with analysts who issue more accurate forecasts. Similarly, analyst turnover within a brokerage has a detrimental effect on forecast accuracy of the remaining analysts. Overall, the results suggest that situational or brokerage related factors have a significant effect on analysts' forecast accuracy.

JEL Classification: G29