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Macro uncertainty, analyst performance, and managerial ability

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Abstract

This paper documents the systematic and negative effects of heightened macro uncertainty on financial analyst performance and the potential for managerial ability to moderate such negative effects. Specifically, we find that macro uncertainty measures are significantly and negatively correlated with the accuracy and informativeness of analysts’ earnings forecasts and positively correlated with the dispersion of earnings forecasts. Furthermore, we find that the negative effects of macro uncertainty on analyst performance are significantly mitigated in firms with high managerial ability. Our results provide a broad overview regarding the negative effects of macro uncertainty on analyst performance and indicate that managerial ability could be a potential moderator to mitigate the negative impacts of macro uncertainty on analyst performance, which is based on the upper-echelons theory.

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Notes

  1. Following Frankel et al. (2006) and He et al. (2019, 2020), we measure the informativeness of analyst forecasts as the magnitude of the stock price reaction to analysts’ forecasts.

  2. The Economic Uncertainty index is publicly available at https://www.policyuncertainty.com/us_monthly.html.

  3. Data on managerial ability are publicly available at https://faculty.washington.edu/pdemerj/data.html. The results are similar when we use the managerial ability score instead of the rank to measure managerial ability.

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Authors and Affiliations

  1. Department of Accounting, College of Business, San Francisco State University, San Francisco, CA, 94132, USA

    Min Chen & Lufei Ruan

  2. Shenzhen Audencia Business School, WeBank Institute of Fintech and Guangdong Laboratory of Artificial Intelligence, and Digital Economy (SZ), Shenzhen University, Shenzhen, 518060, China

    Zhaobo Zhu

  3. Department of Finance, Audencia Business School, 44300, Nantes, France

    Zhaobo Zhu

  4. Department of Accounting, School of Business, St. Bonaventure University, New York, 14778, USA

    Fangjun Sang

Authors
  1. Min Chen
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  2. Lufei Ruan
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  4. Fangjun Sang
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Correspondence to Zhaobo Zhu.

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Appendix: Variable definitions

Appendix: Variable definitions

Accuracy

Earnings forecast accuracy, calculated as—1 times the absolute value of the difference between the last earnings forecast issued by each analyst and firms’ actual earnings per share scaled by the price per share

Dispersion

Earnings forecast dispersion, calculated as the standard deviation of all earnings forecasts issued for a firm over a year

Informativeness

The three-day cumulative abnormal return (CAR) around analysts’ announcement dates of earnings forecasts for a firm

MA

Managerial ability, constructed by Demerjian et al. (2012a, b)

EU

Economic uncertainty index, constructed by Jurado et al. (2015)

EPU

Policy uncertainty index, constructed by Baker et al. (2016)

Sentiment

Investor sentiment index, obtained from Professor Jeffrey Wurgler’s website at https://people.stern.nyu.edu/jwurgler/

Horizon

Analysts’ forecast horizon, measured as the time between analyst’s announcement date of earnings forecast and a firm’s announcement date of its actual earnings

Risk

Firm risk, calculated as the standard deviation of past 36 months’ monthly stock returns

ROA

Return on assets, calculated as the income before extraordinary items divided by average total assets

Leverage

Firm leverage, calculated as total long-term debt scaled by average total assets

Age

Firm age, calculated as the number of years since the firm first appears on Compustat

Size

Firm size, calculated as the natural logarithm of total assets

R&D

R&D expenditure, measured as R&D expenses divided by average total assets

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Chen, M., Ruan, L., Zhu, Z. et al. Macro uncertainty, analyst performance, and managerial ability. Eurasian Bus Rev 10, 333–353 (2020). https://doi.org/10.1007/s40821-020-00148-8

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