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How do experienced analysts improve price efficiency?

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  • Akyol, Ali C.
  • Qian, Yiming
  • Yu, Frank

Abstract

We document that return anomalies related to management discretions are mitigated for firms followed by more experienced analysts. Nonetheless, only experience directly covering the firm matters while experience covering other firms is not associated with greater price efficiency. Focusing on the accrual anomaly, we then examine research and monitoring as possible channels through which experience mitigates mispricing. For firms followed by more experienced analysts, we find that forecast revisions and stock prices respond more positively to the accrual component of earnings. We further find that accrual quality is higher in firms followed by more experienced analysts, which holds after using both propensity score matching and exogenous events of brokerage closures and mergers to control for endogeneity. Collectively, our results are consistent with monitoring being the primary mechanism by which experienced analysts reduce accrual mispricing.

Suggested Citation

  • Akyol, Ali C. & Qian, Yiming & Yu, Frank, 2023. "How do experienced analysts improve price efficiency?," Journal of Banking & Finance, Elsevier, vol. 149(C).
    • Handle: RePEc:eee:jbfina:v:149:y:2023:i:c:s0378426623000250
    DOI: 10.1016/j.jbankfin.2023.106798
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    More about this item

    Keywords

    Financial analysts; Accrual anomaly; Experience; Accrual quality;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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