Do analysts' backgrounds affect their forecasting performance?

Abstract

By using a manually collected dataset of analysts’ individual backgrounds, this paper examines whether analysts’ backgrounds affect analysts’ performance and market response. This paper considers two analysts’ specific backgrounds: Industry background and accounting background. I predict that analysts who have industry or accounting background perform better than those who do not, due to the better understanding of industry cycle, industry characteristics and the present status of a target company. However, I find an unexpected negative association between analysts’ industry backgrounds and analysts’ performance which is proxied by forecast accuracy. On the other hand, accounting background seems to affect analysts’ performance in a positive way. Lastly, I predict that revisions made by an analyst from certain background will have stronger market response and I find that there are strong market responses to analysts with accounting background. However, I find there are weaker market responses to analyst revisions from analysts with industry background.