Is the Market Smart Enough to Identify Superior Analysts and Follow their Recommendations?

In this article we investigate whether there is persistency in analysts forecasting ability and if it exists, whether the market has the ability to identify these differences in abilities. Our results reveal that the forecasting ability of analysts is persistent. We then investigate whether investors identify superior analysts’ ability by analyzing market reaction to their recommendations compared to the reaction to other analysts. Our findings suggest that the twoday returns after the analysts’ reports’ are strongly positively correlated with analysts’ recommendations and there is a significant difference in reaction between high and low quality analysts. We conclude that the market is smart enough to identify different types of analysts and follow their recommendations respectively.