Security Analysts, Cash Flow Forecasts, and Turnover

Abstract

We examine the relation between security analyst turnover and the relative accuracy of their annual earnings and cash flow forecasts. Controlling for self-selection in an analyst’s decision to issue a cash flow forecast, we find that relatively more accurate earnings and cash flow forecasts reduce the probability of turnover. Relative earnings forecast accuracy decreases the probability of turnover more than relative cash flow forecast accuracy. We conduct two cross-sectional tests. We find that relative cash flow forecast accuracy is more important in the analyst’s career outcome when cash flow forecasts are potentially more useful to investors. We find that relative cash flow forecast accuracy is more heavily weighted in the career outcome when the number of other analysts providing cash flow forecasts for the firm is larger. This finding is consistent with economic intuition that relative performance evaluation is more effective when larger groups of individuals are compared.

Keywords: Earnings forecasting, Econometric models, Evaluating forecasts, Forecasting profession, Monitoring forecasts

JEL Classification: G14, M41