The Effects of Analysts’ Access to Management’s Private Information and the Precision of Publicly Available Information on Analyst Forecast Accuracy

We posit and find that the importance of analyst and forecast characteristics for analyst forecast accuracy varies with analysts' access to management's private information and with the precision of publicly available information. In particular, more experienced analysts and All-Star analysts do not maintain their superior forecast accuracy and analysts employed by large brokerage houses perform even worse than other analysts following the enactment of Regulation Fair Disclosure (Reg FD). In addition, we find a decrease in the importance of effort, the number of industries and firms followed, days elapsed since the last forecast, forecast horizon, and forecast boldness post-Reg FD. The decrease in the importance of most of these characteristics is greater when the precision of publicly available information is low. Our results suggest that the positive effects of experience, effort, brokerage house size, All-Star status for forecast accuracy pre-Reg FD were due to the information advantage these analysts enjoyed, rather than their ability to generate private information. In contrast, following the enactment of Reg FD, the importance of prior forecast accuracy increases and this increase is even greater when the precision of publicly available information is low. This suggests that prior forecast accuracy is related to analysts' ability to generate private information. Because prior evidence suggests that investors consider analyst and forecast characteristics when they evaluate the relevance of analyst forecasts, our findings can help investors to better assess and use the information in analyst forecasts