On the Structure of Analyst Research Portfolios and Forecast Accuracy

Abstract

This study provides insights into the forces and constraints that shape analyst research coverage along country and sector dimensions and the impact of the structure of an analyst's portfolio on forecast accuracy. We find that analyst specialization by country and sector is sensitive to the extent to which firms within a country or sector and firms across country-sectors are exposed to common economic forces, the potential for revenue generation, and broker culture. Our tests indicate that existing research on the relation between analyst portfolio structure and forecast accuracy may suffer from an endogeneity bias. We use our analysis of analyst specialization to develop controls for this bias. Once we employ these controls, we find that country diversification is * Georgia State University; †Emory University; ‡University of Texas at Dallas; §Northeastern University. We thank an anonymous referee for several valuable insights and the Editor, Merle Erickson, for many useful suggestions. We also thank

Intangible investment and the importance of firm-specific factors in the determination of earnings

“…For example, among US institutions, Kini et al (2009) find that analysts are more likely to specialize within an industry (country) as the commonality of fundamentals within that industry (country) increases. Further, Kini et al (2009) find that analyst specialization at the industry and country levels leads to significant improvements in earnings forecast accuracy.…”

“…For example, among US institutions, Kini et al (2009) find that analysts are more likely to specialize within an industry (country) as the commonality of fundamentals within that industry (country) increases. Further, Kini et al (2009) find that analyst specialization at the industry and country levels leads to significant improvements in earnings forecast accuracy. Similarly, Litov et al (2010) find that firms with unique (common) investment strategies receive less (more) analyst coverage, which in turn leads to a discount (premium) in market value.…”

“…The belief that an entity cannot fully control its intangible resources (in addition to the perceived uncertainty surrounding the future benefits of such resources) has contributed to standard setters' reluctance to recognize intangible assets except in limited circumstances (Lev 2001). 4 With few exceptions, the recognition of intangible assets has been limited to the subset of valuable economic intangibles for which excludable and legally enforceable control rights exist (see Lev 2001;Maines et al 2003;Basu and Waymire 2008;Skinner 2008 for 3 Prior studies document that earnings commonality is an important determinant of several accounting and market phenomena such as stock return comovement (Morck et al 2000;Piotroski and Roulstone 2004;Elgers et al 2004;Ball et al 2009), management disclosure (Gong et al 2009;Kimbrough and Wang 2010), the structure of analyst research portfolios and analyst forecast accuracy (De Franco et al 2011;Kini et al 2009), and the structure of institutional investors' stock portfolios (Engelberg et al 2009). 4 See FASB (1985, para.…”

Sell‐Side Analyst Research and Stock Comovement

“…Shared economic exposure can affect analysts' coverage choices as well as return comovement (Kini et al. [], Hameed et al. []), making it difficult to draw causal inferences about coverage‐specific spillovers.…”

FIRM S DEGREE OF UNCERTAINTY and EARNINGS FORECASTS

“…Palepu (1985) and Rumelt (1982) utilize complete data to investigate the same issue and reach a conclusion similar to that presented by Gort. In terms of literature on product diversification of a firm and earnings forecast accuracy, Kini et al (2009) indicate that the relation between sector diversification and forecast accuracy is contextspecific. In an international context such as European Zone, forecast accuracy may increase with sector diversification, whereas in the U.S., analyst may generate higher accuracy when focus on a specific industry.…”