Sector Versus Country Specialization and Financial Analysts' Performance

Abstract

European financial research departments have been re-organized over the last decade. Formerly structured along country lines, they have been refocused towards industry-based structures. We investigate whether this evolution impacted the quality of financial analysts' earnings forecasts. Specifically, we compare the performance of country-specialized financial analysts to the performance of sector-specialized financial analysts. We show that the former issue on average soundly more accurate and timelier forecasts than the latter, which tends to reveal that country specialists benefit from an informational advantage over analysts specialized by sectors. We investigate potential sources of this informational advantage. Proximity appears to be the most likely explanation.

Keywords: Financial analysts, forecast accuracy, local advantage, country factors, industry factors

JEL Classification: G24