Core Specialization, Forecast Accuracy, and the Market for International Analysts

Abstract

We investigate the relation between core specialization, earnings forecast accuracy, and the employment prospects of international equity analysts over the period 1996-2002. Specifically, we address the following issues: (1) Are analyst earnings forecasts more accurate for core stocks than for non-core stocks? (2) How is an analyst's forecast accuracy for core stocks affected by the inclusion of non-core stocks in her research portfolio? (3) Is there a relation between the size of the core and an analyst's overall accuracy, accuracy in core stocks, and accuracy in non-core stocks? (4) Does the market for analysts draw a distinction between performance in the core and non-core in making the job promotion (separation) decision? Seeking answers to these questions is important because the manner in which analyst research coverage is organized by brokerages has implications for the efficiency of information production in the economy. Our analysis suggests that forecast accuracy varies systematically across components of analysts' research portfolios, and some of this variation is attributable to the manner in which analysts are evaluated by the market for international analysts. Analysts who diversify their portfolios benefit from information spillovers that flow from core to non-core stocks, and may enjoy economies of scale in information production in the coverage of core stocks. Our evidence is also consistent with analysts focusing their coverage on the country-sector for which they have the greatest aptitude in researching stocks. Due to these influences, analysts produce the most accurate forecast when their portfolios are slightly diversified. While the extant literature focuses on the determinants of overall forecast accuracy, the novel aspect of our study is that it examines how forecast accuracy varies across components of analysts' research portfolios.