Measure for measure: The relation between forecast accuracy and recommendation profitability of analysts

Research output: Contribution to journalArticle

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Abstract

We examine the contemporaneous relation between earnings forecast accuracy and recommendation profitability to assess the effectiveness with which analysts translate forecasts into profitable recommendations. We find that, after controlling for expertise, more accurate analysts make more profitable recommendations, albeit only for firms with value-relevant earnings. Next, we show that conflicts of interest from investment banking activities affect the relation between accuracy and profitability. In the case of buy recommendations, more accurate forecasts are associated with more profitable recommendations only for the nonconflicted analysts. For hold recommendations, higher levels of accuracy are associated with higher levels of profitability for conflicted analysts, provided these recommendations are treated as sells. Finally, we find that regulatory reforms aimed at mitigating analyst conflicts of interest appear to have improved the relation between accuracy and profitability. Specifically, the integrity of buy and hold recommendations has improved and the change is more pronounced for analysts expected to be most conflicted.

Original languageEnglish (US)
Pages (from-to)567-606
Number of pages40
JournalJournal of Accounting Research
Volume45
Issue number3
DOIs
StatePublished - Jun 1 2007
Externally publishedYes

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ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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