Hierarchy and Performance of Analyst Teams

Abstract

We examine the effect of hierarchy on analyst teams’ performance using a large sample of financial analysts from China. Hierarchy, defined as the disparity in power or status within a group, which we operationalize as the difference in experience between the senior and junior analyst in a team, is an important aspect of team structure that could affect team performance. We find that analyst teams with a hierarchy outperform flat teams (teams without a clear hierarchy). Specifically, hierarchical teams issue forecasts with higher accuracy, less optimism bias, less co-movement with the consensus, and stronger investor reactions. The results remain robust after we control for a number of firm and analyst characteristics and fixed effects. Further analysis shows that working in a hierarchical team helps junior analysts improve their individual forecasts for other firms, and senior analysts also benefit from working with junior analysts in hierarchical teams. Our results provide important insights into understanding the effect of team structure on the performance of analyst teams who issue majority of earnings forecasts.