Firm Life Cycle and Analyst Forecast Behavior

Abstract

This study examines how analyst forecast behavior varies over the firm life cycle. While mispricing by investors and firms’ visibility concerns could increase both the supply and demand for analyst services in early-stage firms, forecasting difficulty and limited visibility could in contrast reduce analysts’ incentives to follow these firms. Consistent with analysts responding to investor needs, we find that analyst following is higher for firms in the introduction and growth stage. With regard to forecast accuracy, we find that whereas analyst forecasts are less accurate in the introduction, shake-out and decline stage, analysts issue more accurate forecasts for firms in the growth stage. Additionally, forecast accuracy increases when there is life cycle alignment between the firm and its industry, reflecting the greater extent to which analysts can be benefit from their industry expertise under these circumstances. Yet, forecast accuracy decreases after life cycle changes, suggesting that analyst do not immediately incorporate changes in the earnings generating process after a life cycle shock.

Keywords: Firm life cycle, Analyst following, Analyst forecasts, Investor uncertainty