Conclusion
This article revisits the conflicting results in prior research, and examines whether analysts’ forecast accuracy is higher or lower when an analyst adds or drops coverage.
We find that when analysts add coverage for a firm, their forecast accuracy is significantly lower relative to their peers who follow the same firm. We examine the possibility that our finding is driven by rookie analysts (analysts with less than 1-year experience) being more likely to issue less accurate forecasts. While the forecast accuracy of rookies is lower relative to that of experienced analysts, we find that their forecast accuracy is higher relative to their peers when adding coverage (consistent with making a good ‘‘first impression’’).
When analysts drop coverage for a firm, their forecast accuracy (based on their last forecast) is also significantly lower relative to that of their peer analysts. We explore the possibility that our finding arises from retiring analysts (i.e., analysts who are within their final year before retiring). While the forecast accuracy of retiring analysts is significantly lower relative to those who are not retiring, we find that their forecasts for dropped firms (i.e., final forecast) are more accurate relative to their peers (consistent with leaving a good ‘‘final legacy’’). This suggests that analysts put in extra effort for their final analysts’ report.
Finally, we investigate the impact of industry expertise on their forecast accuracy. We consider the case in which analysts add coverage of a firm that is not within their primary industry. We find analysts’ forecast to be less accurate for firms that are not within their primary industry. However, when analysts add coverage of a firm from their nonprimary industries, our results suggest that analysts tend to pay more attention to the newly added firm to make up for their limited industry knowledge, resulting in more accurate forecasts relative to their peers.
