WHAT INFLUENCES ANALYSTS’ FORECAST ACCURACY: THE FIRM’S ENVIRONMENT OR THE ANALYST’S CHARACTERISTICS

The objective of this paper is to quantify to what extent the absolute forecast error (hence, forecast error) of an analyst is dependent on the analysts’ ability and to what extent it is dependent on the firm’s environment. We analyze this question using the entire I/B/E/S file during the period from January 1992 to January 2019. Our results indicate that the magnitude of forecast errors is by far more determined by the firm’s environment proxied by the firm’s average forecast error in the past than analyst ability. Furthermore, all of the firm characteristics we control for are significant in explaining forecast errors. The firm size, annual return on equity, and the number of analysts have a negative correlation with forecast error, the financial leverage, and book-to-market ratio have a positive correlation with forecast error. For analyst characteristics, only the analyst’s overall tenure is statistically significant and has a negative relation with forecast error.