Do Differences in Analyst Quality Matter for Investors Relying on Consensus Information?
Roni Michaely, Amir Rubin, Dan Segal, Alexander Vedrashko
Management Science · 2024 · Volume 70 · Issue 2
Abstract
This study investigates whether investors can reap economic benefits from analyzing differences in analyst quality. Although high-quality analysts’ average forecast is more accurate than the consensus forecast for firms with a large analyst following, the benefits of using high-quality analysts’ average forecasts are not economically significant. In contrast, the value of analyst quality differentiation exists in the second moment of forecasts. High-quality analysts’ forecast dispersion gives investors an advantage in dealing with uncertainty by predicting return volatility and providing opportunities for economically significant returns using option straddle and post-earnings announcement drift investment strategies. This paper was accepted by Suraj Srinivassan, accounting. Funding: A. Rubin and A. Vedrashko thank the financial support of the Social Sciences and Humanities Research Council of Canada (SSHRC). Supplemental Material: The data are available at https://doi.org/10.1287/mnsc.2023.4699 .
Keywords
consensus, analyst quality, forecasts, dispersion, post-earnings announcement drift
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