Professional Connections within Analyst Teams and Forecast Accuracy

Abstract

Understanding factors associated with the performance of the sell-side analyst is of great value in both theory and practice. We profile the crucial influence of professional connections among security analysts on generating earnings forecast in this study based on a dataset of analysts’ employment history obtained from the Securities Association of China and analysts’ history forecasts obtained from CSMAR. By estimating a multivariate linear regression model, we find that professional connections within analyst teams are positively associated with earnings forecast accuracy. The results of Fisher's Permutation test further confirm that the effect of professional connections on analyst forecast quality is stronger when firms covered are facing decreasing EPS. Our results still hold for additional analyses with an alternative measure for professional connections. In conclusion, this work confirms the significant role of professional connections in information sharing and mutual understanding among analysts.