Does experience affect security analysts accuracy? Empirical evidence

Sell-side analysts are considered as financial intermediaries who process, transform and transfer information in order to enable investors to make appropriate investment decisions. To date, however, it is largely unclear whether analysts possess individual forecasting abilities as research in this area provides mixed evidence. In this paper we analyze whether sell-side security analysts focusing on European stocks produce more precise target price forecasts as their firm- and industry-specific experience increases. Our study attempts to shed light on this issue. To our knowledge this is the first analysis on the accuracy of European sell-side security analysts over a horizon that spans more than one decade. Our analysis is of particular interest as over the last decade analysts have come under closer supervisory attention given their vulnerability to numerous conflicts of interest that are not transparent to the investor. In this context we also analyze whether the implementation of regulatory measures to inhibit conflicts of interests have an impact on analysts forecast ability.

Using panel methodology we analyze the forecast accuracy of security analysts from 1999 to 2011. Hereby, we focus on analyst-specific characteristics and control for past volatility, technological progress, chance of the analysts’ employer etc. We use Wharton Research Data Services (WRDS) to retrieve data on analysts’ activities from the Thomson Reuters I/B/E/S database. Individual stock price returns are collected from Thomson Reuters Datastream. We run a regression analysis in order to determine whether the forecast errors of individual security analysts decrease over time as they gain firm- and industry-specific experience.

The results demonstrate that analysts produce more precise target price forecasts as they gain firm- and industry-specific experience. Our results are robust after controlling for prior forecast error, past volatility, technological progress etc. We find no evidence that the implementation of regulatory measures to mitigate analysts’ conflicts of interest have an impact on analysts forecast ability.