Top Three Takeaways from Professor Sinan Gokkaya and Xi Liu's most recent publication
Thursday, February 25 2016 10:00am
Professor Sinan Gokkaya and Xi Liu recently had their work "Before an Analyst becomes an Analyst: Does Industry Experience Matter" accepted into an elite finance journal.
Professor Sinan Gokkaya and Xi Liu collected biological information on financial analysts to answer whether industry experience matters before an analyst becomes an analyst.
What did they find? The two finance professors found that pre-analyst work experience is valuable and has a positive impact on forecast accuracy, career recognition, and market implications.
Read on for some key takeaways from their recently published work in The Journal of Finance, the highest-ranked, elite finance journal.
1. When analysts have related previous industry experience, their forecasts are more accurate.
Although this may appear to be an obvious observation, until now it has been formed on personal accounts rather than empirical research. However, research conducted in this study shows that experienced analysts progress faster on a steeper learning curve when compared to inexperienced analysts. That means that analysts with industry experience improve at a faster rate, resulting in increasingly accurate forecasts when compared to their less-experienced counterparts. Even with limited skill, an industry experienced analyst will have progressively better performance than a higher skilled, but inexperienced industry analyst.
2. Institutional Investors’ Annual All-Star Poll provides the best recognition:
While many analysts appreciate being recognized for their outstanding performance, compensation data shows that being named to the annual all-star poll also has a monetary incentive. Analysts named all-stars by Institutional Investors earned 61 percent higher total compensation than unranked analysts. This study also investigated the likelihood of an analyst being elected to the all-star list. While controlling for variables such as higher-status firms having a greater number of analysts on the list, research shows that analysts with previous industry experience have a 43 percent greater chance of being elected to the list. Industry experience was statistically and economically significant along with the positive correlation of forecast accuracy.
3. How stock prices are impacted by forecasts:
This study also examines data to conclude how stock markets react to forecast revisions delivered by analysts with industry experience. While controlling for a variety of human and firm characteristics such as forecast accuracy, firm size, and the classification of revisions as either positive or negative, researchers ran a regression to determine correlation. Results showed that positive revisions for industry experience analyst have a .43 percent stronger market reaction compared to revisions delivered from analysts with no industry experience. When the forecast revisions are negative there is a weak market reaction is -0.45 percent relative to analysts without industry work experience. Similar to other conclusions of this study, the market reactions were previously recognized as accurate but are now supported with empirical research.