Analyst Experience and Accrual Anomaly: How Do Experienced Analysts Improve Price Efficiency?

Abstract

We document that the accrual anomaly is mitigated for firms followed by experienced analysts, suggesting a positive link between analyst quality and stock price efficiency. We examine two channels through which analysts may improve price efficiency — the research and monitoring channels. We find analysts and investors respond more positively to the accrual component of earnings for firms followed by experienced analysts, consistent with the monitoring channel, whereby experienced analysts bring about better accrual quality. Direct examination of accrual quality confirms that firms followed by experienced analysts have higher accrual quality; this holds around exogenous events of broker mergers and closures.