Analyst reputation and limited attention: How does firm visibility impact measures of reputation?

ABSTRACT

We investigate the determinants of analyst reputation considering the impact of limited attention. We find support for the hypothesis that capital market participants have limited attention and assess analyst reputation based on their large-firm forecast performance, not their performance as a whole. We find no relation between an analyst’s overall forecast accuracy and initially obtaining a high reputation, but we find a significantly positive relation between analyst large-firm forecast accuracy and reputation. Our study reconciles conflicting studies and contributes to the literature investigating analyst incentives, suggesting that high reputation analysts allocate their limited resources to the largest firms in their portfolios.

KEYWORDS:

• Analyst forecasts
• forecast accuracy
• limited attention
• analyst reputation
• institutional Investor

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. Another measure of reputation, job separation (Hong and Kubik 2003), is discussed later in the paper. Other studies (Sorescu and Subrahmanyam 2006; Ertimer, Mayew, and Stubben 2011) use employing brokerage house as a measure of reputation; however, we control for brokerage house in our study. We note the potential weaknesses in the proxy as well: Brown et al.’s (2015) analyst survey reveals only 37% of analysts believe II rankings are important to career advancement, while 83% state broker votes are important. Given that Groysberg, Healy, and Maber (2011) finds the two highly correlated, we believe II rankings are an appropriate proxy for reputation.

2. Bagnoli, Watts, and Zhang (2008) identify that the II survey specifically asks voters to consider an analyst’s usefulness in their vote.

3. To clarify, we do not assume limited attention is a subconscious attribute. Following the excellent literature review on limited attention in Hirshleifer and Teoh (2003, p.341), ‘attention must be selective and requires effort … Conscious thought involves a focus on particular ideas … to the exclusion of others.’

4. Our main analyses focus on larger firms versus smaller firms, but we also split the sample on institutional ownership and dividend-paying firms in our robustness tests.

5. If an analyst changes employer but stays within the same brokerage firm size decile, the move variable will equal 0.

6. Our sample period includes the post-Reg FD period, Sarbanes-Oxley and the Global Settlement. These changes in the capital market environment are likely to impact analyst incentives.

7. The coefficient on BrSize is likely mechanical as analysts employed at the largest (smallest) brokerages cannot move up (down). As more analysts are employed on the right side of the distribution, the mean is negatively skewed. We chose to keep the observations of analysts at largest and smallest firms in order to maintain sample size.

8. These results are robust to using the raw accuracy variable as opposed to the ranked accuracy variable. The results also are qualitatively similar if we remove the BrSize variable.

9. We also re-run the regressions removing the years 2001, 2008, and 2009 to remove any mechanical increases in the change of market capitalization resulting from recessionary periods. Our results are qualitatively similar without these years. We thank an anonymous reviewer for this suggestion.