Measure for Measure: The Relation between Forecast Accuracy and Recommendation Profitability of Analysts

47 Pages Posted: 5 Apr 2006

See all articles by Yonca Ertimur

Yonca Ertimur

University of Colorado at Boulder - Department of Accounting

Jayanthi Sunder

University of Arizona - Eller College of Management

Shyam V. Sunder

University of Arizona - Department of Accounting

Multiple version iconThere are 2 versions of this paper

Date Written: March 31, 2006

Abstract

We examine the relation between earnings forecast accuracy and recommendation profitability to assess the effectiveness with which analysts translate forecasts into profitable recommendations. We find that after controlling for expertise, more accurate analysts make more profitable recommendations, albeit only for firms with value-relevant earnings. Next, we show that conflicts of interest from investment banking activities affect the relation between accuracy and profitability. In case of Buy recommendations, more accurate forecasts result in more profitable recommendations only for the non-conflicted analysts. For Hold recommendations, profitability is increasing in accuracy for conflicted analysts, provided these recommendations are treated as Sells. Finally, we find that regulatory reforms aimed at mitigating analyst conflicts of interest appear to have improved the relation between accuracy and profitability. Specifically, the integrity of Buy and Hold recommendations has improved and the change is more pronounced for analysts expected to be most conflicted.

Keywords: Analysts, Forecast Accuracy, Recommendation Profitability

JEL Classification: G14, G18, G29, M41

Suggested Citation

Ertimur, Yonca and Sunder, Jayanthi and Sunder, Shyam, Measure for Measure: The Relation between Forecast Accuracy and Recommendation Profitability of Analysts (March 31, 2006). Available at SSRN: https://ssrn.com/abstract=894941 or http://dx.doi.org/10.2139/ssrn.894941

Yonca Ertimur (Contact Author)

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

419 UCB
Boulder, CO 80309-0419
United States

Jayanthi Sunder

University of Arizona - Eller College of Management ( email )

School of Accountancy
1130 E Helen St.
Tucson, AZ 85721
United States
520-626-8489 (Phone)

Shyam Sunder

University of Arizona - Department of Accounting ( email )

210 L McClelland Hall
1130 E Helen St
Tucson, AZ 85721
United States

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