Once in a Lifetime: Analyst Teams and Crisis Events

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Abstract

In this study I propose to examine whether analyst teams issue more accurate one quarter and one year ahead EPS forecasts following major (usually negative) one-time events likely to substantially impact the financial well-being of a large fraction of the market (like 9/11) as compared to individual analysts. I am motivated in part by Marlene Plumlee’s (2003) finding that analysts do not appear to impound the effect of complex regulatory tax changes into their (quarterly) tax estimates, but do impound less complex regulatory changes. I contend that working in teams should allow analysts to overcome constraints that otherwise prevent them from incorporating the impact of complex, one-time events into their forecasts. This position is supported by prior research that finds teams perform better than individuals on learning and problem-solving tasks, in part because teams possess diverse viewpoints and access to greater cognitive resources than individuals (e.g. Laughlin et al., 1968; Johnson et al., 1978; Shaw 1932; Shaw & Ashton 1976). However, unlike individual analysts, analyst teams must coordinate responses to major events amongst their members, and may subsequently issue less timely reports, as found in Brown and Hugon (2009). If analyst teams endeavor to be as timely as individual analysts following major events, coordination problems suggest teams may not be more accurate than individual analysts. Thus, it is an empirical question whether analyst teams issue more accurate forecasts than individual analysts following major one-time events.

Author

• Kathryn Brightbill, University of Iowa