Did Analysts Contribute to the Disappearance of the Accrual Anomaly?

Abstract

We use the recent disappearance of the accrual anomaly to investigate analysts’ contribution to improved information processing by investors. Prior research finds that investors and analysts made accrual-related pricing and forecast errors, respectively, in the anomaly period. As sophisticated information intermediaries, analysts could have corrected their accrual-related forecast bias and thus provided a mechanism for investors to correct accrual-related mispricing. Using all-star status and the analyst’s provision of a cash flow forecast as proxies for expertise, we find that both expert and non-expert analysts continue to issue forecasts with predictable accrual-related bias after the disappearance of the accrual anomaly. Furthermore, the accrual anomaly is similar for firms followed by analysts and for non-followed firms, and disappears at the same time for both. Thus, investors began to correctly incorporate accruals information in security prices even though analysts continued issuing earnings forecasts that have predictable accrual-related bias. Our results conflict with the widely-held notion that analysts are sophisticated information intermediaries who improve market efficiency.