When Do Associate Analysts Matter?

Abstract

Sell-side equity analysts often work in hierarchical teams. Lead analysts manage a team of associate and junior analysts, who take part in the team’s tasks. We hypothesize a division of labor between lead and associate analysts where lead analysts focus on higher-importance tasks and delegate secondary tasks to their associates. We find that associate analyst fixed effects explain more of the variation in forecast accuracy than lead analyst fixed effects do. In contrast, lead analyst fixed effects explain more of the variation in forecast timeliness and in the stock price reaction to the analyst report. These results suggest that associate analysts have a significant role in forecasting while lead analysts are the main contributors to the qualitative information in the report. In cross-sectional tests, we find that lead analysts are more involved in the coverage of larger firms that likely generate more trading commissions to the brokerage house. We also document that lead analysts are more involved when more information processing is required and associate analysts are more involved as they gain experience. Overall, our study documents the division of labor between lead and associate analysts and the significant role of associate analysts in forecasting.