Dancing with Analysts

Extensive theories and evidence predict that board gender diversity improves analyst forecast accuracy. Consistently, I find robust firm-level and firm-analyst-level evidence that female directors significantly reduce analyst forecast error when their number on the board reaches a critical mass of three or more. An instrumental variables approach identifies that this effect is concentrated in firms with high analyst coverage, implying that board-analyst interaction may play a role. I discover a board-side mechanism and an analyst-side mechanism that drive the results. From the board side, by correcting analysts’ misjudgments of earnings uncertainty, female directors persuade analysts not to make less accurate herding-negative forecast revisions. I dissect this mechanism using a simple theoretical model of analyst herding behavior and board persuasion and further empirically prove two propositions derived from the model. From the analyst side, forecast accuracy for firms with board critical mass is more closely linked to promotion and thus analysts have incentives to allocate more effort to these firms. Finally, the finding that the labor market does not reward analysts for outperformance achieved through herding-negative revisions suggests that the two mechanisms are intertwined with each other. Overall, I observe a win-win situation between analysts and female directors: Female directors avoid overly pessimistic forecasts, and analysts gain better career prospects. In other words, female directors dance in harmony with analysts