Does Experience Affect Security Analysts’ Accuracy? Empirical Evidence

Sell-side security analysts are considered as financial intermediaries who process, transform and transfer information in order to enable investors to make appropriate investment decisions. Prior research provides mixed evidence on the effect of experience on analysts' accuracy. In this paper we empirically analyze the forecast accuracy of analysts from 2003 to 2012 using data from the Thomson Reuters I/B/E/S database. Utilizing both cross-sectional and panel analysis we find significant evidence that analysts become more accurate as they accumulate firm-specific experience. Being aware of this finding, investors should use analysts experience as a signal and put more weight on forecasts issued by these analysts. We argue that experienced analysts produce more precise forecasts because they have superior knowledge on financial markets, corporate finance and the regulatory framework (professional competences) and are more able to build up ties with the decision makers of the firms to be evaluated to gain additional firm-specific insights and collect non-publicly available information (social competences)