Analyst Industry Diversification and Earnings Forecast Accuracy

Abstract

This study of the effects of both number of business segments followed by an analyst and analyst industry diversification on individual analyst earnings forecast accuracy applies a new measure of an analyst9s diversification. The measure uses a combination of the number of two-digit SIC code business segments reported by the company and the number of two-digit SIC code business segments followed by the individual analyst to calculate an analyst9s diversification measure for each analyst-company combination. The analysis indicates that as an analyst follows more business segments and a greater diversification of industry, his earnings forecasts are significantly less accurate. These results have implications for researchers who use analyst earnings forecasts in studies; investors who use forecasts for company valuation; and brokerage firms in evaluating individual analysts and assigning analysts to companies.