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Buy-Side Analyst Forecasts More Optimistic, Less
Accurate Than on the Sell-Side
CFA Institute Financial Analysts Journal article
compares earnings forecasting performance data from 1997-2004
Charlottesville, Va., July 16, 2008 − Buy-side
analysts make more optimistic and less accurate forecasts than their
counterparts on the sell side, according to an article (PDF) by a trio of Harvard Business School
academics published in the July/August CFA Institute
Financial Analysts Journal.
“Buy-Side vs. Sell-Side Analysts’ Earnings Forecasts,” by Boris
Groysberg, Paul Healy, and Craig Chapman, compares data for U.S.
companies from buy-side analysts at a top U.S. investment firm and
publicly available data and information on U.S. sell-side analysts.
As a percentage of actual earnings, the mean (median) buy-side forecasts
are 8-16 percent (3-12 percent) higher than those on the sell side, and
the buy-side mean (median) absolute forecast errors are 11-15 percent
(4-11 percent) higher than those of their sell-side peers.
“We conclude that roughly one-third of the buy-side analysts’ forecast
optimism and one-fifth of their absolute forecast error is attributable
to the buy-side firm’s higher retention rate for low-quality analysts,”
the authors wrote. “The performance differences also appear to have
arisen because the buy-side firm did not measure its own analysts against
the sell side, whereas sell-side analysts are regularly measured against
each other.”
Groysberg is an assistant professor, Healy is James R. Williston
Professor of Business Administration, and Chapman is a doctoral candidate
of business administration at Harvard Business School.
Five more articles appear in the July/August FAJ:
- “Systemic Credit Risk: What Is the Market Telling Us?” by Vineer Bhansali, Robert Gingrich, and Francis A. Longstaff, CFA
- “Long-Term Impact of Russell 2000 Index Rebalancing” by Jie Cai and Todd Houge, CFA
- “Valuing Illiquid Common Stock” by Edward A. Dyl and George J. Jiang
- “Stock Repurchases and the EPS Enhancement Fallacy” by Jacob Oded and Allen Michel
- “How Variation in Signal Quality Affects Performance” by Jia Ye
The FAJ is published bimonthly by CFA Institute. More
information about the FAJ may be found at www.cfapubs.org.
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