Analyst Reputation, Earnings Forecast And Rating Revision

As professionals on the capital markets, the main duty of securities analysts are to make earning forecasts and to give rating and investment advice after comparing the company’s intrinsic value and the market price. The main focus of this paper is the relationship between analyst reputation and the quality of their reports, especially the accuracy of their earnings forecast and information content of their ratings.The paper compares the Best Analysts elected by the New Fortune Magazine from2007-2011with the analysts who did not appear on the list. In this paper, they are respectively referred to as "star analyst" and "non-star analyst".On the topic of relationship between analyst reputation and their earnings forecast accuracy, the paper use a combination of univariate non-parametric tests and multivariate tests. Firstly, we use the Wilcoxon rank sum test and median test methods to test if there are significant differences between "star analyst" and "non-star" analyst. Then further use the Fama-Macbeth sectional regression method to test if the influence of analyst reputation on their earnings forecast accuracy is significant. At the same time, we also take advantage of the model to detect the different factors affecting the two types of analysts’earnings forecast accuracy. Further, the paper establish a Logit model to test if the analysts’last year forecast accuracy will influence their probability of being elected to the list in the next year. The above empirical results show that, analyst reputation, as an explanatory variable coefficient, is not significant, which further illustrates that the analyst reputation does not influence the accuracy. In addition, analysts’last-year forecast error will not influence the probability of their being elected as "star analyst" next year either.On the topic of the information content of analysts’rating modification, the paper use the event study method to get the corresponding equity portfolio cumulative abnormal return (CAR) after the analysts make rating amendment. After getting the CAR of portfolios, we further do the t-test in combination with graphics to explore the information content in a different window period. The test shows that star analysts’ rating upgrade in short term is more trustful and has more influence on the security market. However, this advantage fades away during the mid-to-long period. Also, star-analyst’s leapfrog downgrade rating amendment shows more credibility and has more influence on the market, which also gradually disappear in the mid-to-long term. There’s no significant difference between star analyst and non-star analyst when they make between-level rating amendment. The paper speculated that this short-term advantage may come from several possible sources:star analyst owns stronger research capacity; analysts were first elected on the list because of luck and after that they have stronger influence on the market because of their fame; being a star analyst will help them to build better relationship with the management thus improving channels of information.In summary, the paper finds that the star analysts do not have a significant advantage over the non-star analysts. On the other hand, the accuracy of analysts’ earnings forecast will not affect the probability of their being elected as star analyst in the next year. Further, the star analysts’ rating amendment shows more information content and has more influence on the market. Such an advantage will fade away in the mid-to-long run.