UK security analysts’ idiosyncratic factors and predictive ability

Abstract

This is the first study to examine forecasting ability and the impact of UK analysts’ idiosyncratic factors (experience, firm coverage and resources). The focus is on a sample of 21 084 annual earnings-per-share forecasts made by UK analysts for FTSE-100 companies between 1993 and 1998, derived from the I/B/E/S International database. Consistent with experimental expectations, this study finds that UK analysts’ forecasting abilities are a positive function of experience and brokerage house resources, and are negatively related to extreme firm coverage. It also appears that analysts working for larger brokerage houses have greater prior experience and are less likely to have extreme firm-coverage requirements.

Acknowledgements

The author gratefully acknowledges the contribution of Thomson Financial for providing their I/B/E/S EPS data free. These data have been provided as a part of a broad academic programme to encourage earnings expectation research.

Notes

¹ In order to examine how analysts’ characteristics impact accuracy, it is important to concentrate on well-followed firms. Many small firms receive only limited monitoring from analysts: such forecasts are less likely to be timely and informative.

² This figure for ‘identified’ analysts compares with 4.5 years of firm experience for US analysts identified by Jacob et al. (1999, pp. 59–60), though this depends on analysts’ brokerage houses. Where US analysts display high levels of mobility between brokers, their firm-experience averages less than 20 months.