How Important Is Past Analyst Forecast Accuracy?

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Abstract
The Wall Street Journal rates analysts on the basis of past earnings forecast accuracy. These analyst ratings are important to practitioners who believe that past accuracy portends future accuracy. An alternative way to assess the likelihood of “more” or “less” accurate forecasts in the future is to model the analyst characteristics related to the accuracy of individual analysts' earnings forecasts. No evidence yet exists, however, as to whether an analyst characteristics model is better than a past accuracy model for distinguishing more accurate from less accurate earnings forecasters. I show that a simple model of past accuracy performs as well for this purpose as a more complex model based on analyst characteristics. The findings are robust to annual and quarterly forecasts and pertain to estimation and prediction tests. The evidence suggests that practitioners' focus on past accuracy is not misplaced: It is as important as five analyst characteristics combined. Practitioners often rely on the accuracy of analysts' past earnings forecasts to predict future forecast accuracy. A number of sources provide ratings or rankings of past accuracy. For example, the Institutional Investor All-America Research Team rankings and the StarMine SmartEstimate are based partly on past accuracy, and the ratings published annually in the Wall Street Journal are based entirely on past accuracy. An alternative way to assess the likelihood of “more” or “less” accurate forecasts in the future is to model the analyst characteristics related to the accuracy of analysts' earnings forecasts. No evidence yet exists, however, as to whether an analyst characteristics model is better than a past accuracy model for distinguishing more accurate from less accurate earnings forecasters. I addressed this issue in the study reported here. Consistent with Wall Street wisdom that past accuracy portends future accuracy, several researchers have shown that past accuracy is significantly positively corre...