Do Security Analysts Improve Their Performance with Experience?

Abstract

In this paper, we examine whether sell-side security analysts generate more accurate quarterly earnings forecasts and more profitable stock recommendations as their experience with a specific firm increases. We also examine whether the market relies more on forecasts made by analysts who have more firm-specific experience. Consistent with the "Learning By Doing" model, we find that the accuracy of quarterly earnings forecasts improves with the number of prior quarters the analyst has followed the firm, controlling for both the functional form of the learning phenomenon and other factors previously shown to affect analyst forecasting performance. Moreover, we find that the market incorporates the analyst's experience level in forming expected earnings; the weight placed on the analyst forecast increases with the experience level of the analyst. Our results suggest knowledge of an analyst's experience can be used to improve the accuracy of consensus earnings forecasts.

JEL Classification: M41, G29, G12, G14