Do Analyst Minions Matter?

• In Event: Financial Reporting--Innovative Issues

Abstract

Sell-side equity analysts often work in a hierarchical team. Lead analysts manage a team of associate and junior analysts, who take part in modeling future earnings, writing the analyst reports, and producing price targets and stock recommendations. We examine the relative contribution of lead analysts and associate analysts to the team’s performance. We find that associate analyst fixed effects explain 55.6 percent more of the variation in forecast accuracy than lead analyst fixed effects. In contrast, we find that lead analyst fixed effects explain 6.2 times more of the variation in forecast timeliness than associate analyst fixed effects. These results suggest that the decision to issue a forecast is at the discretion of the lead analyst. In cross-sectional tests, we find that less experienced lead analysts explain more of the variation in forecast accuracy compared to more experienced lead analysts. We also find that lead analysts explain more of the variation in the accuracy of the first forecast than the last forecast in the quarter. These results suggest that experienced lead analysts are less involved in EPS forecasting and that lead analysts are more involved when more information processing is required. Lastly, we find that the length of the collaboration of the lead analyst and the associate analyst improves forecast accuracy, but not forecast timeliness. Overall, our study documents the significant role of associate analysts and their contribution to the team’s performance.

Authors

• Menghai Gao, George Washington University

• Yuan Ji, Hong Kong Polytechnic University

• Oded Rozenbaum, George Washington University