Do Non-Investment Bank Analysts Make Better Earnings Forecasts?

This study compares the earnings forecasts of analysts employed by investment banks with those employed by firms not involved in investment banking. We discuss possible resource and informational advantages for investment bank analysts, and conflicts of interest faced by both groups, suggesting that, despite incentives stemming from corporate financing operations, investment bank analysts may nevertheless provide superior forecasts. We also compare forecast accuracy and relative optimism within investment bank analysts between affiliated and unaffiliated analysts. Our results indicate that, controlling for relevant factors identified in prior research, investment bank analystsʹ forecasts are on average more accurate than forecasts made by other analysts. Among investment bank analysts, affiliated analysts issue more accurate forecasts than unaffiliated analysts. Further analyses reveal evidence consistent with the employment of higher-quality analysts and additional resources contributing to, but not completely explaining, the relation between forecast accuracy and investment banking and also with investment-banking affiliations conferring informational advantages. Regarding alleged biases caused by conflicts of interest, we find that investment bank analystsʹ forecasts are less optimistic than those of their non-investment bank counterparts. We discuss implications of our results for the Global Settlement brokered by New York State Attorney General Elliott Spitzer, the Securities and Exchange Commission, and ten large investment banks.