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The Association Between the Legal and Financial Reporting

Environments and Forecast Performance of Individual Analysts

Ran Barniv
Kent State University
Graduate School of Management, CBA
Kent, OH 44242
Phone: 330-672-1112
Fax: 330-672-2545
E-mail: rbarniv@bsa3.kent.edu

Mark Myring
Ball State University
College of Business
Muncie, IN 47306
Phone: 765-285-5108
Fax: 765-285-8024
E-mail: mmyring@bsu.edu

Wayne B. Thomas
University of Oklahoma
Michael F. Price College of Business
307 W. Brooks, Room 212B
Norman, OK 73019
Phone: 405-325-5789
Fax: 405-325-7348
E-mail: wthomas@ou.edu

Current Version March 2005


Final version is forthcoming in Contemporary Accounting Review

We appreciate the helpful comments anonymous reviewers and an associate editor of the CAR,
A. Amir, S. Beninga, workshop participants at the universities of Cincinnati, Pennsylvania State,
and Tel Aviv, and participants in a concurrent session of the AAA annual meeting, Hawaii,
August 2003. We also acknowledge Thomson Financial for providing I/B/E/S International and
U.S. Detail History data.
The Association Between the Legal and Financial Reporting
Environments and Forecast Performance of Individual Analysts

Abstract
We test the ability of analyst characteristics to explain relative forecast accuracy across legal
origins (common law versus civil law). Common law countries generally have more effective
corporate governance mechanisms, including stronger investor protection laws and inputs
provided through higher-quality financial reporting systems. In this type of environment,
investors are more willing to compete for superior investment decisions because they expect to
be equitably rewarded, and investors are more likely to demand information about accounting
earnings because earnings have more value relevance. The increased demand by investors for
earnings information increases the economic incentives of analysts to provide more accurate
earnings forecasts. We predict that analysts with superior ability and resources in common law
countries will more consistently outperform their peers because appropriate market-based
incentives exist. In civil law countries, where the demand for earnings information is reduced
because of weaker corporate governance mechanisms and lower-quality financial reporting, we
predict that analysts with superior ability will less consistently provide superior forecasts.
Results are consistent with our expectations and suggest an association between legal and
financial reporting environments and analysts’ forecast behavior.

Keywords Analysts characteristics, relative forecast performance, investor demand, common


law, civil law, quality of financial reporting systems, international accounting.

2
The Association Between the Legal and Financial Reporting
Environments and Forecast Performance of Individual Analysts
1. Introduction

We test the ability of analyst characteristics to explain relative forecast accuracy across

legal origins. In common law countries, where investor protection laws are stronger and financial

reporting is generally perceived to have higher quality (La Porta, Lopez-de-Silanes, Shleifer, and

Vishny 1997, 1998, 2000a; Ball, Kothari, and Robin 2000), the increased demand by investors

for earnings information may create incentives for analysts to provide that information

accurately. Analysts with superior characteristics (e.g., ability, effort, experience, resources, etc.)

are more likely to issue a superior forecast relative to their peers. In civil law countries, weaker

investor protection laws and lower-quality financial reporting may reduce the economic

incentives of analysts to incur costly activities to provide a superior earnings forecast. We expect

that it will be more difficult to relate individual analysts’ characteristics to relative forecast

performance in civil law countries.

Examining the relation between relative forecast performance and analyst characteristics

across legal regimes provides evidence outside the United States, where the bulk of this research

has been conducted.1 Understanding analyst behavior in other environments provides additional

insight into how analysts’ efforts in accurately forecasting earnings can contribute to the

informational efficiency of financial markets (Frankel, Kothari, and Weber 2002). The results

also contribute to our understanding of the relation between investors’ demands and analysts’

behavior (Defond and Hung 2002). As the value relevance of reported earnings declines,

investors may have less demand for analysts’ earnings forecasts and demand other sources of

information such as cash flow forecasts.2 Our results may also be helpful in investigating other

related research issues, such as the value relevance of accounting numbers across countries. Prior

1
research has focused primarily on estimating the relation between earnings and stock prices to

understand investors’ demand for accounting earnings (e.g., Ball, Kothari, and Robin 2000; Ali

and Hwang 2000). We extend this literature by examining whether the relation between analyst

characteristics and relative forecast accuracy differs across legal origins consistent with

investors’ demand for earnings information.

Consistent with expectations, we find that the relation between analyst characteristics and

relative forecast accuracy is stronger in common law countries. These results are consistent with

analysts’ forecast behavior responding to the demand by investors for earnings information. In

common law countries where investor protection laws are stronger, financial reporting is higher-

quality, and the demand by investors for earnings information is greater, analysts with superior

abilities tend to distinguish themselves more clearly. In civil law countries, it is more difficult to

explain analysts’ relative forecast accuracy. Overall, we find that the relation is strongest in the

United States, followed by non-U.S. common law countries. The relation is weakest in the civil

law countries. Results within the three origins of the civil law classification (French, German,

and Scandinavian) suggest that the quality of financial reporting systems plays a role in these

relations beyond the influence of investor protection laws. Finally, we find some empirical

support for the notion that cash flow forecasts may substitute for earnings forecasts when

earnings are less relevant (Defond and Hung 2002). The relation between analysts’

characteristics and relative cash flow forecast accuracy is stronger in civil law countries than in

common law countries.

The remainder of the paper is organized as follows. Section 2 develops the hypotheses.

Section 3 outlines the research design and section 4 details the data and sample selection. Section

5 reports results and section 6 provides additional analyses. The paper concludes in section 7.

2
2. Hypotheses

We provide the following rationale for our tests. Common law countries are generally

perceived to have stronger investor protection laws (La Porta, Lopez-de-Silanes, Shleifer, and

Vishny 1997, 1998, 2000a)3 and higher-quality financial reporting (Ball, Kothari, and Robin

2000).4 In these settings, earnings information can play a more prominent role in corporate

governance mechanisms and therefore have greater value relevance.5 The greater value relevance

of earnings information increases investors’ demand for that information when making decisions.

The increased demand by investors offers proper economic incentives for analysts to compete in

providing accurate forecasts of earnings. Those analysts having the ability and resources to

outperform other analysts will, on average, do so because the market-based reward structure

established by investor demand offers analysts fair incentives (Schipper 1991). In other words,

the rewards for making accurate forecasts fairly outweigh the cost of gathering and processing

information when investor protection laws are strong and the quality of the financial reporting

system is good. For common law countries, we expect analysts with superior characteristics

(ability, effort, experience, resources, etc.) to more consistently outperform their peers, resulting

in a stronger relation between analysts’ characteristics and relative forecast accuracy.

In civil law countries, financial accounting systems are generally perceived to be of lower

quality in terms of their ability to reflect accurately the underlying economic activity of the firm

(Ball, Kothari, and Robin 2000; Guenther and Young 2000; Bhattacharya, Daouk, and Welker

2003; Francis, Khurana, and Pereira 2003). Financial accounting practices in civil law countries

are oriented less toward serving the needs of outside investors (O’Brien 1998; Lang, Lins, and

Miller 2004) and investor protection laws are weaker (La Porta, Lopez-de-Silanes, Shleifer, and

3
Vishny 1997, 1998, 2000a). These factors likely weaken the demand by investors for earnings

information, which reduces the economic incentives of superior analysts to outperform their

peers. Providing a superior earnings forecast is costly and analysts with superior abilities and

resources will incur the incremental costs of gathering information only when they expect to be

equitably rewarded. We expect that the reduction in incentives of superior analysts to make

superior forecasts will lead to a weaker relation between analyst characteristics and relative

forecast performance in civil law countries (i.e., relative forecast accuracy occurs more randomly

in civil law countries).

Furthermore, among the common law countries, prior studies cited in the preceding

paragraphs suggest that the United States has some of the strongest investor protection laws and

higher-quality financial reporting. If investor protection laws and quality of financial reporting

affect the relevance of accounting earnings to investors, one would expect the demand for

earnings information by investors and the incentives of analysts to compete and provide that

information accurately to be greater in the United States than in most of the non-U.S. common

law countries. Similarly, as discussed in the preceding paragraphs, we expect that analysts in

non-U.S. common law countries will have more incentive to compete and provide more accurate

forecasts relative to their peers than will analysts in civil law countries.

Overall, the preceding ideas lead to our first three hypotheses.

HYPOTHESIS 1. Analyst characteristics better explain relative forecast accuracy in the


common law countries than in civil law countries.

HYPOTHESIS 2. Analyst characteristics better explain relative forecast accuracy in the


United States than in non-U.S. common law countries.

HYPOTHESIS 3. Analyst characteristics better explain relative forecast accuracy in non-


U.S. common law countries than in civil law countries.

4
It is also interesting to consider whether the strength of investor protection laws or the

quality of the financial reporting system offers the greater motivation to analysts to provide

superior forecasts. We examine whether analyst characteristics are useful for explaining relative

forecast accuracy across three groups of civil law countries. Within the civil law origin, La Porta,

Lopez-de-Silanes, Shleifer, and Vishny (1997, 1998) find that countries of the French origin

have weaker investor protection laws than do countries of the German origin. However,

countries of the French origin have higher quality and more transparent financial accounting

information than do countries of the German origin (Ball, Kothari, and Robin 2000; Francis,

Khurana, and Pereira 2003). Thus, the incentives for analysts to provide superior forecasts might

be stronger in the German origin countries because of better investor protection laws or stronger

in the French origin countries because of higher-quality financial reporting. By estimating the

ability of analyst characteristics to explain relative forecast accuracy in the French versus

German origins, we expect to obtain some indication of the impact that investor protection laws,

on the one hand, versus quality of financial reporting, on the other hand, has on the behavior of

analysts.

Relative to other civil law origin countries, the Scandinavian origin has the better investor

protection laws (La Porta, Lopez-de-Silanes, Shleifer, and Vishny 1997, 1998) and the higher-

quality financial reporting (Ball, Kothari, and Robin 2000; Francis, Khurana, and Pereira 2003).

We therefore predict that analyst characteristics will have greater explanatory power for this

group of civil law countries. Thus,

HYPOTHESIS 4. Analyst characteristics differentially explain the relative forecast


accuracy across the three civil law origins.

5
Table 1 summarizes the strength of investor protection laws and the quality and

transparency of financial reporting and their expected impact on the relative performance of

analysts across legal origins.

[Insert Table 1 about here]

3. Research design and determinants of relative forecast accuracy

Extending the model of Jacob, Lys, and Neale (1999), we examine the impact of analyst

activity, experience, portfolio complexity, specialization, and internal environmental factors on

the ability of analysts to produce superior forecasts of earnings relative to their peers. One

possible limitation of using their model is that it was developed in a U.S. context. While there

could be other important analyst characteristics in other countries, we believe the United States

provides a good setting for establishing a benchmark model of the way in which analyst

characteristics explain relative forecast accuracy when the demand for earnings information is

high.6

We estimate the following model, where the first 10 variables are those used in Jacob,

Lys, and Neale (1999) and the final three represent additional international attributes of analysts

and their brokerage firms.

(AFEk,j,t/MAFEj,t)-1 = α0 + β1*HORIZk,j,t + β2*CHANGEk,j,t + β3*EXPk,j,t + β4*COMPk,j,t +

β5*SPECk,j,t + β6*FREQk,j,t + β7*B-SIZEk,j,t + β8*B-INDk,j,t + β9*PINk,j,t +

β10*POUTk,j,t + β11*C-EXPk,j,t + β12*C-SPECk,j,t + β13*B-Ck,j,t + εk,j,t

The dependent variable measures the relative forecast accuracy of analyst k to all other

analysts following company j in year t. AFE is the absolute value of analyst k’s forecast error and

MAFE is the mean absolute forecast error of all analysts issuing a forecast for company j in year

t.7

6
The independent variables are defined as follows:

HORIZ = The number of calendar days between the forecast issue date and the earnings

announcement date.

CHANGE = Dummy variable that takes a value of 1 (0 otherwise) when there has been a change

in the assignment of specific analyst k following company j for a particular brokerage in year

t.8

EXP = The natural log of the number of years analyst k has issued forecasts for company j.

COMP = The number of companies followed by analyst k in the calendar year in which the

forecast was issued.

SPEC = Percentage of companies followed by analyst k with the same I/B/E/S industry code as

company j.

FREQ = Number of forecasts issued by analyst k for company j in year t.

B-SIZE = Percentile ranking of the total number of analysts employed by the brokerage house to

which analyst k belongs in the calendar year in which the forecast was issued, relative to

other brokerage houses.

B-IND = Percentage of analyst k’s brokerage house analysts which follows company j’s industry

in the calendar year in which the forecast was issued.

PIN = Portion of new analysts that come from outside the brokerage house relative to the total

number of analysts who worked for analysts k’s brokerage house during the calendar year in

which the forecast was issued.

POUT = Portion of analysts who left analyst k’s brokerage house relative to the total number of

analysts who worked for analysts k’s brokerage house during the calendar year in which the

forecast was issued.

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C-EXP = Dummy variable that takes a value of 1 (0 otherwise) when analyst k has issued

forecasts for more than three years for any company in a country.9

C-SPEC = Percentage of companies followed by analyst k in the same country where the analyst

has issued forecasts for company j in year t.

B-C = Percentage of analyst k’s brokerage house analysts which follow company j’s country in

the calendar year in which the forecast was issued.

The variables HORIZ and FREQ represent analyst activity, EXP and C-EXP stand for

experience, COMP represents portfolio complexity, while SPEC and C-SPEC correspond to

specialization. Finally, internal environmental factors include B-SIZE, B-IND, B-C, PIN, and

POUT. Consistent with prior research, we subtract the mean of the independent variable for each

year for the empirical tests (Clement 1999; Jacob, Lys, and Neale 1999). For the common law

sample, we expect HORIZ, COMP, PIN, and POUT to have a positive relation with relative

forecast error and CHANGE, EXP, SPEC, FREQ, B-SIZE, B-IND, C-EXP, C-SPEC, and B-C to

have a negative relation. We expect the significance of the relations to be higher for the U.S.

sample than for the non-U.S. common law sample. For our civil law sample, we predict that the

significance of the relations will be further reduced or become insignificant.

4. Data and sample selection

The data are obtained from I/B/E/S for the period 1984-2001 (for companies with fiscal

year-end between January 1984 and December 2000). We use the International edition and U.S.

edition of the I/B/E/S Detail History files.10 Summary statistics for the final sample used in our

study are reported in Table 2. The results are aggregated for 12 common law countries and 21

civil law countries. We base our aggregation of the results on legal origins (La Porta, Lopez-de-

8
Silanes, Shleifer, and Vishny 1997, 1998, 2000a). The common law countries are further

separated into the United States and non-U.S. common law countries.11 We further classify the

civil law countries into French origin (11), German origin (6), and Scandinavian origin (4).

[Insert Table 2 about here]

Including only the analyst’s most recent annual forecast for each company-year, the

database includes 1,038,329 annual earnings forecasts issued by 30,966 analysts for 27,379

companies. We first exclude observations for countries not included in our data, that are team f

orecasts, and that do not have actual annual earnings available. This reduces the sample to

28,738 analysts in 1,321 brokerage firms who provide 1,012,189 company-year forecasts for

25,933 companies in the 33 countries. We further exclude observations where there are less than

three analysts following the company in that year.12

Panel A of Table 2 reports summary statistics for the final sample. The final sample

consists of 673,817 annual forecasts for 15,220 companies, issued by 27,082 analysts who work

for 1,151 brokerage houses. The majority of forecasts (79 percent) were for companies in

common law countries.13 The average number of analyst following per firm-year is greatest in

the U.S. (10.55), followed by non-U.S. common law countries (8.65) and civil law countries

(8.23).14 Panel B of Table 2 shows additional descriptive statistics regarding firm characteristics

for each of the legal regimes. For our sample, we report that civil law companies are, on average,

larger than common law companies. This is important because an overweighting of larger firms

in the common law sample could bias results in favor of our hypotheses. The enhanced

information environment of larger firms increases demand for their securities (Merton 1987),

offering greater economic incentives to superior analysts to outperform their peers. In this case,

civil law countries (i.e., larger firms in our study) rather than common law countries would be

9
expected to exhibit a stronger association between relative forecast accuracy and analyst

characteristics, absent any effects of the legal origin (e.g., investor protection laws, quality of

accounting). We also show that the common law firms have higher earnings to price ratio and

greater analyst forecast errors than the civil law firms. Forecast dispersion among analysts is

approximately the same across origins. We further report descriptive statistics for U.S. versus

non-US companies and for companies in the three civil law origins.

5. Results

Univariate statistics

Table 3 shows the means and medians for variables representing analyst characteristics for

each legal origin. The reported unadjusted amounts provide descriptive statistics for the

independent variables and comparisons between (1) common law and civil law countries, (2) the

U.S. and non-U.S. common law countries, (3) non-U.S. common law countries and civil law

countries, and (4) pairs of the three civil law origin countries.15 In general, the common law

analysts provide significantly shorter forecast horizons, present fewer changes in analysts

following a company, have more experience, follow fewer companies, specialize more in the

same industry, and provide more forecasts for each company than do the analysts in the civil law

countries. They are employed in larger brokerage houses with larger percentages of analysts

following companies in the same industry, and these houses have smaller portions of new and

outgoing analysts than do civil law analysts. Finally, common law analysts have more country-

specific experience, greater specialization in a particular country, and greater brokerage house

specialization within a country.16

[Insert Table 3 about here]

10
Further analyses of the descriptive statistics show significant differences between all

characteristics of analysts in the United States and analysts in non-U.S. common law countries.

For example, U.S. analysts have more experience and follow more companies in the same

industry, but they provide fewer forecasts for each company than analysts in the non-U.S.

common law countries. Similarly, all characteristics of analysts in the non-U.S. common law

countries differ significantly from those of the civil law countries. For instance, analysts in the

civil law countries are less experienced, have less country-specific experience, provide less

forecasts for each company, and have a greater forecast horizon. Finally, the comparisons

between the three civil law origin countries show significant t-statistics and Wilcoxon Z-statistics

for all of the 13 independent variables.

Test of hypothesis 1

Table 4 presents OLS results for the common law countries and the civil law countries.17

Eleven coefficients are statistically significant in the predicted direction for the common law

sample, but only six coefficients are significant in the predicted direction for the civil law

sample. The coefficients for the forecast horizon (HORIZ) and the analyst-broker turnover

variables (PIN and POUT) are positive (as predicted) and they are significant in the common law

and the civil law countries. The estimated coefficient for portfolio complexity (COMP) is

positive and statistically significant for the common law countries, suggesting that the larger

number of companies followed by an analyst reduces forecast accuracy. This coefficient is not

significant for the civil law countries. The coefficients for frequency (FREQ) are significant and

negative (as predicted) for both origins. The coefficients for analyst specialization (SPEC),

broker size (B-SIZE), and broker-industry specialization (B-IND) are significantly negative (as

11
predicted) for the common law countries, while the coefficients for B-SIZE and SPEC are not

significant (at p <0.05) and B-IND is significant in the unpredicted direction for the civil law

countries. These results suggest that internal environment factors in brokerage houses in civil law

countries do not have the predicted impact on analysts’ relative forecast accuracy as they do in

common law countries. The regression coefficients for experience (EXP) are not statistically

significant across the two groups of countries.

[Insert Table 4 about here]

The coefficients for the three international variables are statistically significant for the

common law countries. The coefficients for C-SPEC and B-C are significantly negative (as

predicted) for both origins. The coefficient for C-EXP, however, is significantly positive (not

negative as predicted) for the common law origin and insignificant for the civil law origin. This

result indicates that analysts in common law countries may have reasons to extend their

forecasting activity to other countries (e.g., they may possess private knowledge) and this

extension leads to more accurate forecasting in the first couple of years.

The R2 for common law countries is 0.1491 and the R2 for civil law countries is 0.0811,

suggesting that analyst characteristics better explain relative forecast accuracy in the common

law countries than in civil law countries. The Chow test (F = 237.6) suggests that model

coefficients are significantly different across origins.18 The t-statistics for tests of differences in

individual coefficients are also reported in Table 4.19 The results show that portfolio complexity,

specialization, analyst activity, and internal environment factors, but not experience, more

significantly explain (in the predicted directions) analysts’ relative forecast accuracy in the

common law countries than in the civil law countries. Eight of the estimated coefficients in the

common law countries have significantly greater magnitudes, in the predicted directions, than do

12
the corresponding coefficients in the civil law countries. For example, relative forecast accuracy

increases by 0.37 percent per day as the forecast age decreases in the common law countries,

which is significantly faster (t = 36.3) than the 0.23 percent increase per day in the civil law

countries, controlling for other variables in the model. This result suggests that common law

analysts provide more effort and compete more aggressively in utilizing recent information than

do civil law analysts. The relative forecast accuracy increases by 3.97 percent for each additional

forecast issued by analysts (FREQ) in the common law countries, which is significantly greater (t

= 4.97) than the 1.56 percent increase in relative forecast accuracy in the civil law countries. The

differences in the coefficients are not significant for the three international variables. This result

suggests that domestic characteristics have a greater impact on the relative forecast accuracy in

the common law countries than in the civil law countries, but the international characteristics

provide similar effects on the relative forecast accuracy in both origins.

In sum, the empirical evidence supports our first hypothesis that analyst characteristics

better explain the relative forecast accuracy in common law countries than in civil law countries.

It seems that analysts in common law countries compete to provide superior forecasts more than

do analysts in civil law countries, and those analysts with superior abilities and resources tend to

outperform their peers.

Test of hypothesis 2

Table 4 also reports the results for comparing the regression model between the United

States and non-U.S. common law countries. In the United States, 10 coefficients are statistically

significant in the predicted direction. One coefficient (C-EXP) is significant in the unpredicted

13
direction.20 Eight coefficients are significant in the predicted directions for the non-U.S. common

law countries. The coefficient for COMP is significant in the unpredicted direction.

The R2s are 0.1494 for the United States and 0.1271 for the non-U.S. common law

countries and the Chow test of differences in model coefficients is significant (F = 75.5).21

Furthermore, of the 10 coefficients significant in the predicted direction for the United States,

eight have a significantly greater magnitude than the corresponding coefficients for the non-U.S.

common law sample. For example, the magnitude of the coefficient for B-SIZE is three times

greater for the U.S. sample than for the non-U.S. common law sample (t = –4.70).

The coefficients for international specialization (C-SPEC) and broker-country factor (B-C)

are significantly negative (as predicted). The coefficient for B-C is significantly more negative

for the United States than for the non-U.S. common law countries (t = –4.09). The coefficients

for C-SPEC, however, are not significantly different. The coefficient for country-specific

experience (C-EXP) is significantly positive (not negative as predicted) for the United States, and

it is not significantly different from the coefficient for the non-U.S. common law countries. In

sum, our results support the second hypothesis. In non-U.S. common law countries, where

investor protection laws and financial reporting are somewhat weaker than in the United States,

we find less evidence that superior analysts distinguish themselves.

Test of hypothesis 3

On the final right column of Table 4, we report results for comparing the regression model

between the non-U.S. common law countries and the civil law countries. The R2 for the non-U.S.

common law countries (0.1271) is greater than that of the civil law countries (0.0811). The

significant Chow test (F = 76.0) suggests that model coefficients are not equal across origins.

14
Four of the variables have a significantly greater magnitude with the predicted signs for

the non-U.S. common law countries than for the civil law countries. The estimated coefficient

for B-C is the only one that is more significant in the civil law countries. Overall, the results

support the third hypothesis, indicating that analyst characteristics have less ability to distinguish

superior analysts in the civil law countries than in the non-U.S. common law countries.

The results in Table 4 support the first three hypotheses. We conclude that analyst

characteristics better explain relative forecast accuracy in countries with stronger investor

protection laws and higher-quality financial reporting. In the United States, where investor

protection laws and financial reporting are generally considered the strongest, we find the most

evidence that analyst characteristics distinguish superior analysts. Furthermore, the evidence is

stronger for non-U.S. common law countries than for civil law countries.

Test of hypothesis 4

Analyses within the civil law countries provide an interesting setting to test the relative

influence of investor protection laws and the quality of financial reporting systems. Compared to

German origin countries, those of French origin have weaker investor protection laws (La Porta,

Lopez-de-Silanes, Shleifer, and Vishny 1997) but higher-quality financial reporting (Ball,

Kothari, and Robin 2000; Francis, Khurana, and Pereira 2003). Which environment provides

superior analysts with stronger incentives to distinguish themselves? If analyst forecast behavior

is related more to quality of financial reporting (strength of investor protection laws), we would

then expect superior analysts to distinguish themselves better in French (German) origin

countries. Therefore, tests within French and German origin classifications provide some insights

into the relative influence investor protection laws and quality of financial reporting can have on

15
investors’ demand for earnings information and analysts’ forecast activities. Since Scandinavian

countries have stronger investor protection laws and higher-quality financial reporting systems

(relative to other civil law countries), we expect this group to provide the strongest evidence of

analysts’ differential forecast ability.

Table 5 reports regression results by the three civil law origins. The R2s are 0.0980,

0.0881, and 0.0711, respectively, for countries of the Scandinavian, French, and Germanic

origins. Chow tests are significant, suggesting differences in model coefficients across origins.

Six (five) regression coefficients are significant for French (German) origin countries in the

predicted direction.22 Of the six significant coefficients for the French sample, three have a

significantly greater magnitude in the predicted direction than those for the German sample. For

example, the estimated positive coefficient for HORIZ in the French origin countries is

significantly greater than the positive coefficient in the German origin countries (t = 8.29). In

addition, the negative coefficient for EXP (as predicted, but significant only at p < 0.10) for the

French sample is significantly smaller than the significant positive coefficient for the German

sample (t = –3.76).

[Insert Table 5 about here]

The greater explanatory power for the Scandinavian sample provides evidence consistent

with analyst behavior being affected by the strength of investor protection laws and quality of

financial reporting. Five coefficients are significant in the predicted direction and three (two) of

these have significantly larger magnitudes in the predicted directions than those reported for the

French (German) sample. The differences between the estimated coefficient of all other variables

in the Scandinavian origin and the other two origins are not significant.

16
None of the coefficients for the Scandinavian sample is significant in the unpredicted

direction, whereas two coefficients are significant in the unpredicted direction for the French and

German countries. We do not consider coefficients in the unpredicted direction to constitute

evidence consistent with analysts responding to investors’ demands for more accurate forecasts.

We base the analyst characteristics used in the model on a reasonable understanding of the

factors likely to distinguish superior analysts. These variables have received empirical support in

the literature. Therefore, the significance of the analyst characteristics in the predicted direction

provides a basis upon which to evaluate the forecast behavior of analysts in different legal and

financial reporting environments.

In summary, within the civil law countries, the greatest and most consistent evidence that

superior analysts distinguish themselves comes from the Scandinavian origin countries, which

have higher-quality financial reporting and stronger investor protection laws. Countries with

stronger investor protection laws but lower-quality financial reporting (i.e., German origin) show

the weakest evidence that analysts strive to outperform their peers. The evidence for the

countries with higher-quality financial reporting but weak investor protection laws (i.e., French

origin) appears to be somewhere in the middle. The differences in the impact of analyst

characteristics on relative forecast accuracy across the civil law countries suggest that while

investor protection laws can influence analyst behavior, they are not the only factors affecting

relative forecast accuracy. The quality, timeliness, and transparency of financial reporting

systems certainly play a role in the demand for earnings information and the incentives of

analysts to distinguish themselves from their peers. These results support the view of Bushman

and Smith (2001) that financial accounting information is an important input to corporate control

mechanism.

17
6. Sensitivity analyses

Impact of analyst characteristics on the relative accuracy of cash flow forecasts

Cash flow forecasts may substitute for earnings forecasts in countries where earnings

forecasts are less value-relevant to investors (Defond and Hung 2002). Hung (2000) reports that

accruals reduce the value relevance of earnings in countries with weak shareholder protection

(civil law countries), but not in countries with strong shareholder protection (common law

countries). The reduced relevance of accruals in civil law countries likely decreases the relevance

of earnings information to investors and increases the relevance of cash flow information. As

investor demand for information moves from earnings to cash flows, analysts may spend

relatively more time and resources on forecasting cash flows. If this is so, then analyst

characteristics may better explain relative cash flow forecast accuracy in civil law countries. We

provide an analysis of cash flow relative forecast accuracy using the same methodology used for

earnings forecasts. We modify some relevant independent variables (e.g., horizon, experience,

frequency, and country-specific experience) for cash flow forecasts. The other independent

variables are the same as those used for the earnings analyses.

The untabulated results show greater explanatory power for the 13-variable regression in

the civil law countries than in the common law countries. The R2s are 0.146 for the civil law

countries and 0.075 for the common law countries. The Chow test is significant (F = 117.7). The

explanatory powers are approximately the same for the United States and the non-U.S. common

law countries. These findings provide some support for the alternate conjecture that some

analysts in civil law countries may spend more time and resources on forecasting cash flow than

on earnings, as those with superior characteristics tend to more consistently outperform their

18
peers. Again, these results are consistent with analysts responding to investors’ demand for

information.23

Forecast performance and termination

We test whether analysts are less likely to continue forecasting when their performance is

bad. We select the worst analyst (i.e., the one with the greatest forecast error) for each firm-year

and estimate the probability that the analyst will forecast earnings for that same company in the

following year. We find that 54.1 percent of the worst analysts from civil law countries provide

forecasts for the same firm next year. Only 34.8 percent and 41.0 percent of the worst analysts

continue to forecast for the same firm in the following year for the United States and non-U.S.

common law countries, respectively. The percentages of worst analysts that continue to forecast

for the same firm are similar across the civil law groups of countries. These results are consistent

with the analyst forecast environment being more competitive in common law countries.

Analysts that provide bad forecasts and therefore fail to meet the information demands of

investors are less likely to continue forecasting earnings for these firms.

7. Summary and conclusions

In this study, we test the ability of analyst characteristics to explain relative forecast

accuracy across legal origins (common law versus civil law). Common law countries typically

have higher-quality financial reporting systems and stronger investor protection laws. In this type

of environment, the increased demand by investors for earnings information increases the

economic incentives of analysts to provide accurate earnings forecasts. We expect analysts with

superior characteristics (e.g., ability, effort, experience, resources, etc.) to outperform their peers

19
in common law countries. In civil law countries, the demand for earnings information is reduced

because of weaker investor protection laws and lower-quality financial reporting. The reduced

demand by investors for earnings information reduces the incentives for analysts to provide

accurate forecasts. Superior analysts may not be motivated to provide more accurate forecasts if

they have no expectation of being equitably rewarded for their efforts and costs. Thus, we expect

the relative performance of individual analysts to be less systematic, making the relation between

analyst characteristics and relative forecast accuracy weaker in civil law countries.

We find results consistent with analyst behavior being related to legal origins. In common

law countries, analyst characteristics better explain relative forecast accuracy. Analyst

characteristics show the weakest association with relative forecast accuracy in civil law

countries. The strongest evidence that superior analysts have incentives to outperform their peers

comes from the United States, where investor protection laws are arguably more effective and

where financial reporting has higher quality. The evidence of superior analysts outperforming

their peers in non-U.S. common law countries is greater than that in civil law countries but less

than that in the United States. Additional sensitivity analyses support these conclusions and

provide further insights into the impact of legal origin on financial analysts’ activities.

We also examine the relation between relative forecast performance and analyst

characteristics within the civil law countries. Those of French origin have higher-quality

financial reporting systems, while those of German origin have stronger investor protection laws.

The Scandinavian origin countries have higher-quality financial reporting and stronger investor

protection laws relative to other civil law countries. The evidence most consistent with superior

analysts outperforming their peers comes from the Scandinavian origin countries, followed by

the French origin countries. German origin countries provide the least consistent evidence that

20
analysts actively compete to outperform their peers. These results constitute initial evidence that

quality of financial reporting plays an incremental and perhaps larger role in affecting analysts’

forecast behavior and investors’ demand for earnings information than does the strength of

investor protection laws.

Future research can further understand the impact that legal origin and financial reporting

quality have on investors’ demand for earnings information and analysts’ activities by

considering additional analyst characteristics. In our paper, we use a model developed in a U.S.

context and incorporate some “international” variables. While the U.S. environment is a natural

starting point for a model relating investor demand for earnings information to analysts’

activities, this represents a possible limitation of the study. Other variables in other countries

may lead to additional insights in this area. Another potential for future research would be to

consider how differences in information asymmetry across countries affects the incentives of

superior analysts to outperform other analysts. One might expect superior analysts to have

greater incentives when information asymmetry is high because the gains to exploiting accurate

forecasts may be highest under such situations. However, this expectation would need to be

reconciled to the findings presented in this paper that superior analysts better distinguish

themselves in common law countries, where information asymmetry is generally perceived to be

lower.

21
Endnotes:

1. Early studies on the relative forecast accuracy of individual analysts revealed no systematic

differences in abilities (e.g., O’Brien 1987; Coggin and Hunter 1989; O’Brien 1990; Butler

and Lang 1991). More recent research has, however, found some differences (e.g., see

Stickel 1992; Sinha, Brown, and Das 1997). Subsequent research has sought to explain these

differences (Mikhail, Walther, and Willis 1997; Clement 1999; Jacob, Lys, and Neale 1999).

In an international context, Rees, Swanson, and Clement (2003) associate forecast accuracy

with cultural factors in several countries.

2. Francis, Schipper, and Vincent (2002) find a complementary, rather then substitutional,

relation between earnings announcements and analyst reports. Similarly, we assume that the

roles of financial accounting systems and analyst activities are complements rather than

substitutes. Analysts provide forecasts of earnings based on mandatory GAAP in each

country, and forecasting lower-quality earnings cannot substitute for reporting lower-quality

earnings.

3. Research shows that greater legal protection is associated with more valuable stock markets

and a larger number of listed firms (La Porta, Lopez-de-Silanes, Shleifer, and Vishny 1997),

larger listed firms (Kumar, Rajan, and Zingales1999), greater cross-listing of foreign

companies (Pagano, Randl, Roell, and Zechner 2001), higher valuations for listed firms

(Claessens, Djankov, Fan, and Lang 1999; La Porta, Lopez-de-Silanes, Shleifer, and Vishny

1999a), greater dividend payouts (La Porta, Lopez-de-Silanes, Shleifer, and Vishny 2000b),

lower concentration of ownership and control (La Porta, Lopez-de-Silanes, Shleifer, and

Vishny 1999b; Claessens, Djankov, and Lang 2000), lower private benefits of control

(Zingales 1994; Nenova 1999), and higher correlation between investment opportunities and

22
actual investments (Wurgler 2000). Prior findings on investor protection and equity markets

have also received some theoretical support (Shleifer and Wolfenzon 2000).

4. The development of financial markets is directly related to the quality of financial accounting

information (Black 2001). Countries with more developed financial markets have better

accounting disclosures (Levine 2001; Hope 2003a, b, c), more timely and transparent

accounting information (Ali and Hwang 2000; Ball, Kothari, and Robin 2000; Guenther and

Young 2000), less management of reported earnings (Leuz, Nanda, and Wysocki 2003;

Bhattacharya, Daouk, and Welker 2003; Fulkerson, Jackson, and Meek 2002), higher-quality

earnings (Hung 2000; Fulkerson, Jackson, and Meek 2002), and greater demand for auditing

services (Francis, Khurana, and Pereira 2003).

5. Bushman and Smith (2001) suggest that the corporate control mechanisms can include both

internal mechanisms (e.g., managerial incentive plans) and external mechanisms (e.g.,

monitoring by outside shareholders or debtholders and securities laws that protect outside

investors against expropriation by corporate insiders). Financial accounting systems provide

direct and indirect inputs into corporate control mechanisms.

6. In the United States, the high demand by investors for earnings information has lead to strong

competition among analysts to forecast that information accurately. In civil law countries, the

relation between analyst behavior and the usefulness of financial accounting information is

less obvious (O’Brien 1998). As the demand for future earnings information weakens,

analysts have fewer economic incentives to outperform their peers and characteristics

identified by the benchmark model should have less ability to explain relative forecast

accuracy.

23
7. We do not focus on whether consensus analyst forecast errors differ across legal regimes.

Analysts’ forecast errors can be affected by a number of factors including economic and

cultural conditions, income smoothing, industry composition, earnings management,

management of analysts’ forecasts, or level of economic development (Basu, Hwang, and Jan

1998). Our within-firm design allows us to identify whether analysts with superior abilities

and resources reliably outperform their peers, while controlling for these potentially

confounding effects.

8. The variable CHANGE refers neither to a change in the overall number of analysts following

a firm nor to a change in number of analyst following in a particular brokerage firm.

CHANGE refers to our firm-year-analyst observations and takes the value one in the first

year t when particular analyst k is assigned or replaced by the brokerage firm for forecasting

earnings for firm j.

9. We use a cut off of three years because it is about the 75th percentile of analysts in most

countries. We assume that the highest quartile could be considered as experienced analysts in

a country. We also measure C-EXP as a continuous variable consistent with EXP, but the

two variables are highly correlated.

10. On a global scale, I/B/E/S currently receives forecasts from more than 7,000 analysts

representing 800 brokerage firms providing forecasts for approximately 18,000 companies.

Many analysts in our database who provided forecasts in previous years are currently

inactive.

11. Results for the United States are reported separately for testing the second hypothesis and for

two other reasons. First, U.S. observations make up approximately 58 percent of our global

24
sample. Second, reporting separate results for the U.S. sample facilitates comparisons with

prior U.S. studies (Jacob, Lys, and Neale 1999; Clement 1999).

12. Similar to Jacob, Lys, and Neale (1999) and Clement (1999), we require at least three

analysts so that our measure of relative forecast performance is meaningful.

13. Less than ten percent of the analysts provide forecasts for firms in more than one country.

Observations are classified into legal origin based on firm location rather than analyst

location. As a sensitivity test, we control for differences in sample sizes by randomly

selecting observations from the full common law sample, the U.S. sample, and the non-U.S.

common law sample so that all samples sizes would equal the number of observations for the

civil law sample. The results for the random samples resemble those for the complete

samples reported in Table 4, suggesting that differences in sample size do not confound the

results.

14. Presumably, as the incentives of analysts to follow a firm increase, more analysts will follow

the firm and forecast accuracy will increase (Alford and Berger 1999). We calculate the

correlations (1) between forecast accuracy and number of analysts and (2) between the

change in EPS and the change in the number of analysts following the firm. We find these

correlations are stronger for the United States and non-U.S. common law countries than for

civil law countries. These results provide additional support for the notion that the incentives

of individual analyst to forecast more accurately are stronger in common law countries.

15. While we use the mean-adjusted amounts in the regression analyses, we report unadjusted

raw amounts for each descriptive statistic for the independent variables since subtracting the

annual means from each independent variable produces means equal to zero.

25
16. I/B/E/S history is longer for the United States than for non-U.S. countries. We re-estimate the

results for the sub-periods 1991-2001 and 1995-2001. These more recent samples minimize

the effect of analysts with reported one or two years of experience in the first or second year

of available data. Univariate and OLS results for these subperiods are very similar to those

reported in Tables 3 and 4, respectively.

17. We also examine the model including year-intercept dummies that are not statistically

significant for the regressions reported in Tables 4 and 5. Therefore, these results are not

reported.

18. The Chow F-test (Greene 2003) is used to test whether some or all the regression coefficients

are equal between the common law and civil law origins.

19. The reported t-statistics examine the significance of the difference in slope coefficients

between the civil law and common law regressions. We do not report an alternative

presentation of pooling the observations and using interactive binary variables to test the

differences between the estimated coefficients of the two samples (Kennedy, 1992, pp. 220-

225). These results are not reported for two reasons. First, the t-tests for the differences in

coefficients reported in Table 4 and 5 are the same using either method. Thus, results of

testing the incremental significance of the interactions and the method reported in our paper

are econometrically equivalent. Second, the R2s for each sample would not be available

using the pooled model with interactive binary variables.

20. We also compare our results with Jacob, Lys, and Neale (1999) using their ten-variable OLS

regression model. Our untabulated results in the United States resemble theirs. We report

greater explanatory power than them and we obtain significant estimated coefficients for

CHANGE and PIN and insignificant coefficient for EXP. We interpret these findings as

26
results of using more recent data for 1984-2001 (Jacob, Lys, and Neale used 1981-1992),

using annual data -- quarterly data are not available for countries other than the United States

(they used quarterly data), and employing I/B/E/S data (while they use Zack’s database). Our

results are similar to findings reported by Clement (1999) who uses I/B/E/S U.S. annual data

for 1985-1994 and reports adjusted R2s closer to ours, even though four of his seven

variables differ from Jacob, Lys, and Neale.

21. We also examine results for Canada using 28,437 analyst-company-year observations. The

results (not tabulated) show that the R2 and most estimated coefficients resemble those of the

non-U.S. common law countries rather those reported for the United States.

22. The coefficients for B-IND are significantly positive (not negative as predicted) for the

French and the German origin countries. This result suggests that industry specialization in

the brokerage house increases the relative forecast error rather than decreases it, unlike in the

United States. Contrary to the predictions, analyst experience (EXP) increases relative

forecast error in the German origin countries, and increasing the number of companies

followed (COMP) decreases relative forecast error in the French origin countries.

23. The results should be interpreted with caution since our final cash flow sample includes only

49,654 analyst-firm-year observations with complete data for all variables. Analysts’ cash

flow coverage is very limited in the United States (Defond and Hung 2002). Our cash flow

sample size is less than 1 percent of the U.S. earnings sample, about 15 percent of the non-

U.S. common law earnings sample, and about 19 percent of the civil law earnings sample.

We report results after winsorizing relative cash flow forecast accuracy at the 1st and 99th

percentiles.

27
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31
TABLE 1
Investor protection laws, quality and transparency of financial reporting, and their expected impact on the ability of analyst characteristics to explain relative
forecast accuracy
Expected Impact on
Quality and Transparency of Relative Forecasts
Origin Investor Protection Laws Financial Reporting Accuracy
Efficiency
Antidirector Creditor of Judicial Accrual Disclosure Audit
Rights* Rights* System† Index‡ Index§ Spending#
Common Law** Stronger 4.0 3.11 8.15 Higher 0.76 70.6 0.27 Greater
Civil Law†† Average 2.4 1.83 7.39 Average 0.58 65.1 0.14 Less

United States Strongest 5.0 1.00 10.0 Highest 0.86 71.0 0.24 Greatest
Non-U.S. Common Stronger 3.9 3.23 8.04 Higher 0.74 70.5 0.27 Greater

French‡‡ Weaker 2.3 1.58 6.56 Average 0.64 62.1 0.12 Below average
German§§ Average 2.3 2.33 8.54 Below Avg. 0.43 62.7 0.12 Below average
Scandinavian## Above Avg. 3.0 2.00 10.0 Higher 0.63 74.0 0.22 Average
Numbers reported represent mean amounts obtained from the following studies:
*
La Porta, Lopez-de-Silanes, Shleifer, and Vishny (1998) – higher number indicates more rights, creditor rights may be classified separately.

La Porta, Lopez-de-Silanes, Shleifer, and Vishny (1998) – higher number indicates more efficiency.

Hung (2000) – higher number indicates greater use of accruals.
§
Francis, Khurana, and Pereira (2003) – higher number indicates better disclosure.
#
Jaffe (1992) as reported in Francis, Khurana, and Pereira (2003) – higher number indicates more audit spending.
**
Countries in the common law origin are Australia, Canada, Hong Kong, India, Ireland, Malaysia, New Zealand, Singapore, South Africa, Thailand, United

Kingdom, and United States.


††
Countries in the civil law origin are Argentina, Austria, Belgium, Denmark, Finland, France, Germany, Indonesia, Italy, Japan, South Korea, Mexico,

Netherlands, Norway, Philippines, Portugal, Spain, Sweden, Switzerland, Taiwan, and Turkey.
‡‡
Countries in the French origin are Argentina, Belgium, France, Indonesia, Italy, Mexico, Netherlands, Philippines, Portugal, Spain, and Turkey.
§§
Countries in the German origin are Austria, Germany, Japan, South Korea, Switzerland, and Taiwan.

32
##
Countries in the Scandinavian origin are Denmark, Finland, Norway, and Sweden.

33
TABLE 2
I/B/E/S summary statistics for our sample, sample period 1984-2001
Panel A: Number of analysts and forecasts across legal origins
Average
Number of Number of
Number of Firm-Year Number of Firm Analysts
Legal Origin Analysts* Forecasts† Years‡ Following

Common law Origin§ 18,009 535,462 53,785 9.96


Civil law Origin# 9,073 138,355 16,806 8.23
Final Observations Used 27,082 673,817 70,591

US 9,198 390,121 36,985 10.55


Non-U.S. common law Origin 8,811 145,341 16,800 8.66

French Origin** 4,735 70,011 7,488 9.35


German Origin†† 3,129 52,951 7,469 7.09
Scandinavian Origin‡‡ 1,209 15,393 1,849 8.33

Panel B: Firm characteristics across legal origins.

MVE EPS/PRICE SD(CON)/PRICE AFE/PRICE


Mean(Med) Mean(Med) Mean(Med) Mean(Med)
Common Law Origin 1004.10 0.0905 0.0168 0.0706
(444.61) (0.061) (0.002) (0.1620)
Civil Law Origin 1199.18 0.0487 0.0177 0.0310
(643.13) (0.005) (0.001) (0.001)
U.S. 1060.78 0.0318 0.0043 0.0666
(486.33) (0.0554) (0.0010) (0.0430)
Non-U.S. Common Law Origin 879.38 0.2209 0.0446 0.0795
(365.57) (0.0814) (0.0094) (0.2188)

French Origin 965.15 0.0873 0.0305 0.0565


(419.17) (0.0134) (0.0028) (0.0022)
German Origin 1540.25 0.0131 0.0042 0.0076
(1102.75) (0.0034) (0.0004) (0.0006)
Scandinavian Origin 786.78 0.0360 0.0205 0.0301
(378.32) (0.0530) (0.0082) (0.0068)
Common-Law Origin versus Civil-Law Origin
t-statastic -18.7§§ 18.1§§ -1.8 27.9§§
Wilcoxon -18.9§§ 77.3§§ 9.7§§ 122.6§§
U.S. versus non-U.S. Common-Law Origin
t-statastic 17.0§§ -79.5§§ -89.0§§ -8.7§§
Wilcoxon 17.0§§ -62.9§§ -133.0§§ -78.7§§
(Table 2 continued on the next page)

34
TABLE 2 (continued)
I/B/E/S summary statistics for our sample, sample period 1984-2001
Panel B (continued): Firm characteristics across legal origins.

Non-U.S. Common-Law Origin versus Civil-Law Origin


t-statastic -25.3§§ 25.3§§ 52.1§§ 24.1§§
Wilcoxon -25.2§§ 84.6§§ 80.9§§ 65.8§§
French Origin versus German Origin
t-statastic -28.8§§ 20.5§§ 27.4§§ 21.0§§
Wilcoxon -33.6§§ 20.4§§ 26.6§§ 24.2§§
French Origin versus Scandinavian Origin
t-statastic 6.2§§ 7.1§§ 5.1§§ 5.6§§
Wilcoxon 1.3 -13.0§§ -21.3§§ -15.4§§
German Origin versus Scandinavian Origin
t-statastic 23.9§§ -8.8§§ -24.4§§ -13.7§§
Wilcoxon 25.2§§ -35.4§§ -46.6§§ -38.0§§
*
The number of analysts includes all analysts that provide at least one forecast for one company during the period.

Many analysts provide forecasts for many companies.



Only the most recent forecast is included in the reported number of firm-year forecasts.

We report only forecasts for companies followed by at least three analysts.
§
Common law countries are Australia, Canada, Hong Kong, India, Ireland, Malaysia, New Zealand, Singapore,

South Africa, Thailand, United Kingdom, and United States.


#
Civil law countries are Argentina, Austria, Belgium, Denmark, Finland, France, Germany, Indonesia, Italy, Japan,

South Korea, Mexico, Netherlands, Norway, Philippines, Portugal, Spain, Sweden, Switzerland, Taiwan, and

Turkey.
**
Countries in the French origin are Argentina, Belgium, France, Indonesia, Italy, Mexico, Netherlands, Philippines,

Portugal, Spain, and Turkey.


††
Countries in the German origin are Austria, Germany, Japan, South Korea, Switzerland, and Taiwan.
‡‡
Countries in the Scandinavian origin are Denmark, Finland, Norway, and Sweden.
§§
Significant at p-value < 0.01.

MVE = Market value of equity in million U.S. dollars.

EPS/PRICE = EPS deflated by price (including negative EPS).

SD(CON)/PRICE = Standard deviation of I/B/E/S consensus deflated by price.

AFE/PRICE = Absolute forecast error deflated by price.

35
TABLE 3
Raw univariate statistics: Means (medians) by origin, sample period: 1984-2001*

Panel A: Common law origin, civil law origin, United States, and non-U.S. common law origin.
U.S. vs. Non-U.S.
Non-U.S. Common vs. Non-U.S Common
Common Civil Common Civil common vs. Civil
Law Law United Law t-stat. t- stat. t-stat.
Variables† Origin‡ Origin§ States Origin (Z- stat.)# (Z- stat.)# (Z-stat.)#
HORIZ 123.3 134.6 124.1 121.3 -38.3 §§ 9.44§§ -31.9§§
§§
(95.0) (111.0) (95.0) (93.0) (-27.6) (23.8)§§ (-29.8)§§
§§
CHANGE 0.20 0.21 0.24 0.19 -4.90 12.5§§ -11.4§§
§§
(0.00) (0.00) (0.00) (0.00) (-4.93) (12.4)§§ (-11.4)§§
§§
EXP 0.80 0.59 0.84 0.71 106.1 58.3§§ 48.6§§
§§
(0.69) (0.69) (0.69) (0.69) (88.6) (48.5)§§ (45.6)§§
§§
COMP 25.2 26.2 22.3 32.9 -9.17 -85.6§§ 36.2§§
§§
(17.0) (14.0) (18.0) (16.0) (90.7) (30.4)§§ (47.7)§§
§§
SPEC 0.67 0.51 0.71 0.58 174.2 133.7§§ 51.8§§
§§
(0.80) (0.50) (0.85) (0.64) (166.3) (141.9)§§ (48.9)§§
§§
FREQ 3.56 2.96 3.11 4.78 65.6 -113.0§§ 104.2§§
§§
(3.00) (2.00) (3.00) (3.00) (67.4) (-39.6)§§ (82.2)§§
§§
B-SIZE 0.87 0.84 0.88 0.87 68.9 20.0§§ 18.7§§
§§
(0.94) (0.90) (0.94) (0.91) (67.4) (48.1)§§ (10.6)§§
§§
B-IND 0.13 0.12 0.14 0.10 28.5 127.0§§ -41.1§§
§§
(0.09) (0.09) (0.10) (0.08) (8.23) (90.6)§§ (-32.0)§§
§§
PIN 0.29 0.38 0.27 0.33 -133.2 -88.5§§ -46.0§§
§§
(0.25) (0.33) (0.24) (0.27) (-136.7) (-69.2)§§ (-52.4)§§
§§
POUT 0.25 0.29 0.24 0.29 -65.9 -81.7§§ -6.16§§
§§
(0.21) (0.24) (0.20) (0.23) (-61.6) (-75.4)§§ (-9.20)§§
§§
C-EXP 0.56 0.31 0.61 0.42 177.5 170.5§§ 61.4§§
§§
(1.00) (0.00) (1.00) (0.00) (167.0) (166.9)§§ (60.9)§§
§§
C-SPEC 0.93 0.78 0.98 0.79 113.4 224.1§§ 6.30§§
§§
(1.00) (1.00) (1.00) (1.00) (105.2) (54.8)§§ (23.6)§§
§§
B-C 0.83 0.60 0.91 0.64 205.3 289.2§§ 27.6§§
§§
(1.00) (0.67) (1.00) (0.68) (171.2) (273.6)§§ (16.6)§§

36
TABLE 3 (continued)
Raw univariate statistics: Means (medians) by origin, sample period: 1984-2001*

Panel B: Civil Law Origin – French, German, and Scandinavian


French vs. French vs. German vs.
German Scand. Scand.
French German Scand. t-stat. t-stat. t-stat.
Variables† Origin** Origin†† Origin‡‡ (Z-stat.)# (Z-stat.)# (Z-stat.)#
HORIZ 132.7 139.7 127.4 -10.8 §§ 5.65§§ 12.9 §§
§§ §§
(111.0) (118.0) (99.0) (-12.1) (5.85) (13.7) §§
§§ §§
CHANGE 0.20 0.22 0.21 -9.50 -3.25 2.79 §§
§§ §§
(0.00) (0.00) (0.00) (-9.50) (-3.30) (2.76) §§
§§ §§
EXP 0.59 0.60 0.54 -3.64 9.90 12.1 §§
§§
(0.69) (0.69) (0.69) (-1.71) (9.29) (9.84) §§
§§
COMP 27.7 27.6 19.3 0.87 28.2 26.8 §§
§§ §§
(14.0) (15.0) (10.0) -(5.43) (37.1) (40.0) §§
§§ §§
SPEC 0.47 0.56 0.52 -42.4 -16.2 10.3 §§
§§ §§
(0.40) (0.57) (0.50) (-41.9) (-18.8) (13.0) §§
§§
FREQ 3.04 2.94 3.07 4.79 -1.33 -5.09 §§
§§ §§
(2.00) (2.00) (2.00) (16.6) (-10.0) (-20.9) §§
§§
B-SIZE 0.84 0.86 0.84 -15.6 -0.67 -10.2 §§
§§ §§
(0.89) (0.90) (0.92) (-3.38) (-2.64) (-0.14)
B-IND 0.10 0.11 0.17 -3.41 §§ -49.6§§ -63.1 §§
§§
(0.08) (0.08) (0.11) (-0.98) (-38.0) (-36.4) §§
§§ ##
PIN 0.39 0.33 0.38 43.1 2.45 -27.0 §§
§§
(0.34) (0.27) (0.35) (44.9) (0.53) (31.7) §§
§§
POUT 0.28 0.28 0.27 0.07 14.9 6.61 §§
§§ §§
(0.23) (0.22) (0.25) (4.71) (-4.11) (-8.41) §§
§§ §§
C-EXP 0.29 0.36 0.25 -25.7 10.1 27.0 §§
§§ §§
(0.00) (0.00) (0.00) (-25.6) (10.2) (25.4) §§
§§ §§
C-SPEC 0.77 0.82 0.66 -23.2 10.4 47.3 §§
§§ §§
(1.00) (1.00) (0.86) (-29.4) (37.3) (57.3) §§
§§ §§
B-C 0.59 0.69 0.42 -40.8 53.7 81.4 §§
§§ §§
(0.59) (0.94) (0.29) (-33.2) (45.6) (74.3) §§
*
Unadjusted raw amounts for mean and median are reported since subtracting annual firm-year means for each

variable produces means equal to zero.



Independent variables:

HORIZ = The number of calendar days between the forecast issue date and the earnings

announcement date.

CHANGE = Dummy variable that takes a value 1 (0 otherwise) when there has been a change in the

assignment of specific analyst k following company j for a particular brokerage in year t.

EXP = The natural log of the number of years analyst k has issued forecasts for company j.

COMP = The number of companies followed by analyst k in the calendar year in which the

forecast was issued.

37
SPEC = Percentage of companies followed by analyst k with the same I/B/E/S industry code as

company j (1.00= 100 percent).

FREQ = Number of forecasts issued by analyst k for company j in year t.

B-SIZE = Percentile ranking of the total number of analysts employed by the brokerage house to

which analyst k belongs in the calendar year in which the forecast was issued, relative to

other brokerage houses (1.00= 100 percent).

B-IND = Percentage of analyst k’s brokerage house analysts which follows company j’s industry in

the calendar year in which the forecast was issued (1.00= 100 percent).

PIN = Portion of new analysts that come from outside the brokerage house relative to the total

number of analysts who worked for analysts k’s brokerage house during the calendar year

in which the forecast was issued (1.00= 100 percent).

POUT = Portion of analysts who left analyst k’s brokerage house relative to the total number of

analysts who worked for analysts k’s brokerage house during the calendar year in which

the forecast was issued (1.00= 100 percent).

C-EXP = Dummy variable that takes a value of 1 (0 otherwise) when analyst k has issued forecasts

for more than three years for any company in a country.

C-SPEC = Percentage of companies followed by analyst k in the same country where the analyst has

issued forecasts for company j in year t (1.00= 100 percent).

B-C = Percentage of analyst k’s brokerage house analysts which follow company j’s country in

the calendar year in which the forecast was issued (1.00= 100 percent).

Countries in the common law origin are Australia, Canada, Hong Kong, India, Ireland, Malaysia, New Zealand,

Singapore, South Africa, Thailand, United Kingdom, and the United States.
§
Countries in the civil law origin are Argentina, Austria, Belgium, Denmark, Finland, France, Germany, Indonesia,

Italy, Japan, South Korea, Mexico, Netherlands, Norway, Philippines, Portugal, Spain, Sweden, Switzerland,

Taiwan, and Turkey.


#
Amounts shown represent tests of differences in means (medians) between the two groups.
**
Countries in the French origin are Argentina, Belgium, France, Indonesia, Italy, Mexico, Netherlands, Philippines,

Portugal, Spain, and Turkey.

38
††
Countries in the German origin are Austria, Germany, Japan, South Korea, Switzerland, and Taiwan.
‡‡
Countries in the Scandinavian origin are Denmark, Finland, Norway, and Sweden.
§§
Significant at p-value < 0.01.
##
Significant at p-value < 0.05.

39
TABLE 4
Regression of analyst relative forecast accuracy on analyst- broker-specific characteristics, sample period: 1984-
2001
U.S. vs Non-U.S.
Non-U.S Common Non-U.S. Common vs
Common Civil Common vs Civil Common Civil
Predicted Law Law United Law t-stat.§ t-stat.§ t-stat.§
Variables* Sign Origin† Origin‡ States Origin H1: H2: H3:
Intercept -0.0019 -0.0030 0.0001 -0.0056 0.30 1.30 -0.55
(-0.91) (-0.99) (0.04) (-0.87)
HORIZ + 0.0037 0.0023 0.0038 0.0031 36.3** 14.2** 16.2**
(170.2)* (78.4)* (149.3)* (82.0)*
CHANGE -/? -0.0132 0.0018 -0.0227 0.0119 -2.29†† -4.70** 1.18
(-4.17)* (0.31) (-6.23)* (1.86)
EXP - -0.0037 0.0038 0.0011 0.0047 -1.28 -0.54 0.10
(-1.39) (0.73) (0.35) (0.79)
COMP + 0.0002 -0.0001 0.0007 -0.0004 2.77** 6.32** -1.70
(2.88)* (-1.13) (6.18)* (-2.95)*
SPEC -/? -0.0551 0.0076 -0.0620 -0.0260 -4.97** -2.28†† -1.99††
(-7.86)* (0.72) (-7.39)* (-1.96)**
FREQ - -0.0397 -0.0156 -0.0535 -0.0356 -16.9** -12.3** -12.4**
(-51.3)* (-13.5)* (-54.5)* (-33.2)*
B-SIZE - -0.220 -0.040 -0.230 -0.080 -6.89** -4.70** -1.17
(-18.6)* (-1.87) (-17.8)* (-2.99)*
B-IND - -0.0318 0.1760 -0.0250 -0.0218 -5.07** -0.06 -3.16**
(-2.16)** (4.60)* (-1.60) (-0.44)
PIN + 0.0420 0.0367 0.0296 0.0512 0.37 -1.19 0.78
(4.88)* (3.17)* (2.76)* (3.50)*
POUT + 0.1385 0.0888 0.1632 0.0920 50.4** 3.95** 0.18
(15.7)* (7.42)* (14.7)* (6.48)*
C-EXP - 0.0082 0.0086 0.0076 0.0077 -0.07 -0.02 -0.11
(2.92)* (1.55) (2.27)** (1.39)
C-SPEC - -0.0418 -0.0239 -0.0636 -0.0402 -1.23 -0.48 -1.00
(-3.72)* (-2.58)** (-2.63)* (-2.98)*
B-C - -0.0734 -0.0784 -0.0908 -0.0351 0.46 -4.09** 8.31**
(-11.3)* (-8.63)* (-10.0)* (-3.44)*
Chow-F# 237.6 ** 75.5** 76.0**
2
R 0.1419 0.0811 0.1494 0.1271
Obs. 535,462 138,355 390,121 145,341
*
Independent variables are defined in Table 3 and country classifications are defined in Table 1. White adjusted t-

statistics are reported in parentheses.



Common law countries are Australia, Canada, Hong Kong, India, Ireland, Malaysia, New Zealand, Singapore,

South Africa, Thailand, United Kingdom, and the United States.

40

Civil law countries are Argentina, Austria, Belgium, Denmark, Finland, France, Germany, Indonesia, Italy, Japan,

South Korea, Mexico, Netherlands, Norway, Philippines, Portugal, Spain, Sweden, Switzerland, Taiwan, and

Turkey.
§
Amounts shown represent tests of differences in coefficient betweens the two groups.
#
The Chow statistics test that the vectors of estimated coefficients are the same for the two groups.
**
Significant at p-value < 0.01.
††
Significant at p-value < 0.05.

41
TABLE 5
Regression of analyst relative forecast accuracy on analyst- broker-specific characteristics in the Civil law
countries, sample period: 1984-2001

French vs French vs German vs


Pred. French German Scand. German Scand. Scand.
Variables* Sign Origin† Origin‡ Origin§ t-stat.# t-stat.# t-stat.#
Intercept -0.0025 -0.0028 -0.0085 0.05 0.65 0.58
(-0.60) (-0.52) (-1.02)
HORIZ + 0.0025 0.0020 0.0025 8.29†† 0.90 -4.28††
(60.9)†† (41.6)†† (24.8)††
CHANGE -/? 0.0011 -0.0030 0.0304 -0.33 -1.49 -1.68
(0.13) (-0.34) (1.71)
EXP - -0.0142 0.0276 -0.0026 -3.76†† -0.63 1.63
(-1.84) (3.45)†† (-0.16)
COMP + -0.0004 0.0001 0.0007 -2.61†† -2.77†† -1.40
(-3.31)†† (0.97) (1.90)
SPEC -/? 0.0138 0.0208 -0.0679 -0.29 2.62†† 2.59††
(1.01) (1.05) (-2.42)††
FREQ - -0.0070 -0.0259 -0.0179 7.23†† 2.76†† -1.85
(-5.00)†† (-11.7)†† (-4.83)††
B-SIZE - -0.0011 0.070 -0.020 -3.55†† -1.16 1.10
(-3.40)†† (1.74) (0.32)
B-IND - 0.1856 0.2544 0.1253 -0.75 0.64 1.27
(3.19)†† (3.60)†† (1.70)
PIN + 0.0106 0.0955 -0.0376 3.26†† 1.20 3.09††
(0.73) (4.42)†† (-1.01)
POUT + 0.0877 0.0811 0.1454 0.27 -1.15 -1.29
(4.91)†† (4.73)†† (3.10)††
C-EXP - 0.0078 0.0097 0.0089 -0.16 -0.02 0.01
(0.96) (1.16) (0.51)
C-SPEC - -0.0319 -0.0011 -0.0176 -1.40 -0.51 0.53
(-2.69)†† (-0.06) (-0.70)
B-C - -0.0613 -0.1084 -0.1100 2.44‡‡ 1.30 0.04
(-4.99)†† (-7.25)†† (-3.10)††
Chow-F** 76.6†† 49.8†† 60.8††
2
R 0.0881 0.0711 0.0980
Obs 70,011 52,951 15,393
*
Independent variables are defined in Table 3. White adjusted t-statistics are reported in parentheses.

Countries in the French origin are Argentina, Belgium, France, Indonesia, Italy, Mexico, Netherlands, Philippines,

Portugal, Spain, and Turkey.



Countries in the German origin are Austria, Germany, Japan, South Korea, Switzerland, and Taiwan.
§
Countries in the Scandinavian origin are Denmark, Finland, Norway, and Sweden.
#
Amounts shown represent tests of differences in coefficients between the two groups.
**
The Chow statistics test that the vectors of estimated coefficients are the same for the two groups.

42
††
Significant at p-value < 0.01.
‡‡
Significant at p-value < 0.05.

43