Earnings Forecast Performance and Financial Analyst Turnover During Mergers

Abstract

Unlike prior studies that find financial analyst turnover primarily reflects poor earnings forecast performance, we document a U-shaped relation between earnings forecast accuracy and analyst turnover surrounding mergers, i.e., top forecast performers also experience high turnover. We study mergers in the financial industry from 1994 to 2004 when significant consolidation within the industry created considerable analyst turnover. We document that even with the myriad of factors impacting analyst turnover during mergers, analyst performance in forecasting accounting earnings is by far the most influential. Our finding of high turnover for good performers is important because it indicates a loss of top talents for both the merged firms and for the financial analyst profession. This potentially has implications for investors who rely on analyst research. While we focus on analysts, our findings can also be informative about how mergers impact employees in general.