Analyst ability and research effort: non-EPS forecast provision as a research quality signal

Peter F. Pope () and Tong Wang
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Peter F. Pope: Bocconi University
Tong Wang: Barclays Bank plc

Review of Accounting Studies, 2023, vol. 28, issue 3, No 5, 1263-1315

Abstract: Abstract The range of non-EPS forecast types provided by individual analysts to I/B/E/S has increased dramatically over time but varies considerably across firms. We propose that in providing a broader range of forecast types, analysts can signal superior research ability and research effort. Consistent with this hypothesis, we document positive associations between the number of forecast types (NFT) an analyst provides and common proxies for research quality, including earnings forecast accuracy, price target accuracy, stock recommendation profitability, market reactions to stock recommendation revisions, and analyst career outcomes. The effects of NFT are incremental to other quality proxies used in the literature and are distinct from the issuance of specific non-EPS forecast types studied previously (e.g., cash flow forecasts). We demonstrate the information value of NFT to investors by examining the out-of-sample performance of portfolios formed conditional on NFT and exploiting revisions in consensus earnings forecasts and individual analysts’ stock recommendations. We conclude that the number of forecast types an analyst provides for a firm is a readily available proxy for the quality of her research.

Keywords: Analysts; Earnings forecasts; Forecasting ability; I/B/E/S; Price target forecasts; Stock recommendations; Capital market reactions; Analyst career outcomes (search for similar items in EconPapers)
JEL-codes: G24 M41 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1007/s11142-023-09791-8

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