Managerial Ability and Analyst Forecast Behavior: Large Sample Evidence

Abstract

Prior literature documents that the managerial ability, derived from frontier analysis, is positively associated with accounting quality (Demerjian, Lev, Lewis, and McVay 2013; Baik, Farber and Lee 2011). In addition, prior literature indicates that number of analysts following a firm is positively associated with accounting quality, and analyst forecast dispersion is negatively associated with accounting quality (Lang and Lundholm 1996; Irani and Karamanou 2003). I examine the relation between managerial ability and the number of analysts following a firm as well as analyst forecast dispersion. I find that managerial ability is positively associated with analyst following a firm and negatively associated with analyst forecast dispersion. In addition, the effects are more pronounced after Sarbanes–Oxley Act of 2002, and are more pronounced for firms with complicated financial reports. Collectively, our findings support the notion that the managerial ability is relevant to analysts' decision making.