Common Individual Auditors and Analyst Forecast Performance

Abstract

We examine the importance of analysts covering firms with common audit partners to analyst earnings forecast performance (hereafter, we term the analyst, auditor, and the firm as being “common”). We find that analysts issue more accurate and less optimistically biased earnings forecasts for firms with common audit partners than other analysts following the same firm without common audit partners. Consistent with expectations, we identify auditors’ style in making audit judgments as the channel through which analysts accumulate better information from covering firms with common audit partners. In a series of cross-sectional analyses, we find that this result is stronger when: (1) analysts suffer from poor direct access to firm-specific information from managers; (2) the information value from common auditors is higher, evident in their clients having more opaque operations, more difficult-to-forecast earnings, and greater stock price synchronicity; and (3) the quality of information that analysts elicit from auditors is higher, evident in auditors belonging to a large audit firm. Our results are robust to different approaches for addressing the potential endogeneity of analysts’ coverage decisions.