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Audit Quality and Analyst Forecast Accuracy

Sat, January 19, 7:30 to 8:30am, TBA

Abstract

We study the relationship between auditor quality, proxied by audit firm industry specialization, and analyst forecast accuracy. Prior research presents diametrically opposite predictions and results regarding the directional relationship between these variables. We show that the confusion in the extant research arises largely from the use of short-horizon (end of year) forecast errors, and the sensitivity of the models employed to the control variables included and the deflator applied to forecast errors. We then demonstrate that analysts long-horizon (beginning of year) forecast errors are a cleaner measure of the predictability of published earnings, and that regressions based on these forecast errors consistently report a significant positive relation between audit quality and forecast accuracy.

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