Determinants of Analyst Replacement

I examine why a brokerage firm replaces an analyst who follows a specific firm for a long run period. Studies exploring regular analyst turnover find earnings forecast accuracy to be a strong factor and suggest that analysts with lower forecast accuracy are more likely to turn over. Thus, the possibility of analyst replacement is higher for analysts with lower earnings forecast accuracy. At the same time, I infer that the brokerage firm is more likely to replace an analyst with a direct competitor in the firm. The better the performance of the direct competitor, the more likely the analyst is replaced. Higher quality analysts (for example, with greater industry experience, higher earnings forecast accuracy, more experience in coverage, or better relationship with the covered firms' executives) likely have a greater chance of survival. The empirical results are consistent with my predictions. I also explore whether the performance of replacement decision is positively related to the increment in quality between the new and the replaced analyst. I find that the performance of replacement decisions is positively related to the increment in quality between the new and the replaced analyst. In addition, the results are not driven the changes in regulations. This study provides new insights into factors that affect the analyst replacement. I demonstrate that the factors that impel brokerage firms to replace, though not fire, an analyst covering a specific firm. The results suggest that analysts need to provide unique and useful guidance to their clients to make themselves indispensible