Impact of forecast effort and investment advice on accuracy

Abstract

Accounting literature offers several explanations for the variation in analysts' forecast precision (e.g. differences in forecast ability, experience or effort). In this chapter, I identify two new determinants of forecast accuracy, namely general forecast effort and the provision of investment advice. The identification of these determinants significantly contributes to existing literature. The results show that investors can use aggregate forecasts based only on those issued in conjunction with investment advice to formulate more accurate estimates on a firm's future earnings performance. Moreover, emphasizing the importance of general forecast characteristics such as general forecast effort in addition to firm-specific characteristics enhances the understanding of the major determinants of forecast accuracy.