Earnings Forecast Accuracy And Career Concerns

Previous studies show that analysts’ compensation is not linked to earnings forecast accuracy. We evidence however that analysts have incentives to issue accurate forecasts. We show that brokerage houses reward their best forecasters by assigning them to large, mature firms. Covering such firms increases the potential for future compensation as these firms generate a great deal of investment banking and trading activities. The coverage of such firms also increases analysts’ exposure to large buyside investors. We find that analysts covering large, mature firms are twice as likely to be recognized as star analysts by Institutional Investor. We explain our findings on forecast accuracy as the result of brokerage houses’ concerns for reputation. ∗Paris-Dauphine University. This article was written in part when Tristan Roger was a visiting scholar at the Haas School of Business, University of California, Berkeley