Surrogate Expertise Indicators of Professional Financial Analysts.

When All-America Team membership is used as a surrogate for expertise in an analysis of experimental forecast error, the results are not substantially different from those noted by Hunton and McEwen (1997). This finding provides evidence that membership on the All-America Research Team is a valid, publicly available surrogate of expertise for financial analysts.

SUMMARY AND CONCLUSIONS

This study finds that membership on the All-America Research Team appears to provide a parsimonious, publicly available and valid proxy for expertise of financial analysts. Stickel (1992) provides empirical evidence that analysts who have been named to the All-America Research Team are more accurate than those who have not been named to the team. Stickel suggests that position on the team can be viewed as a proxy for relative reputation and compensation. Research findings from our study support and complement Stickel's suggestion. We find that team membership correctly classifies the financial analysts as relatively high (low) expertise at a 90% rate, where expertise is based on brokerage firm management's historical accuracy measure of each participating analyst. The team membership surrogate was validated against research results presented by Hunton and McEwen (1997).

We believe these findings are important since: (1) the markets use analysts' forecasts in making assessments of share price, (2) researchers use these estimates as surrogates for market earnings expectations, and (3) professional financial analysts generally overestimate earnings. Our findings suggest that with knowledge of the team membership status for an individual analyst, market participants, researchers and even managers can discount the effects of such overestimates. Further, identification of experts and their decision-making processes can facilitate the development of expert systems.

The current study is limited in that the analysis includes only one brokerage firm, one industry, and one firm within the industry. Longitudinal analysis would further enhance these findings. An additional limitation focuses on the validity of the IRIS system for use in behavioral research since use of the IRIS system may have altered the behavior of the subjects. Early eye-movement protocols have been shown to be valid methods for collecting behavioral research data; thus, we assume the IRIS system also is valid.

Identification of the All-America team membership surrogate for expertise is good news since this information is publicly available. Further, the results of the current study provide insights into the behavioral characteristics of expert financial analysts. Our factor analysis of experiential and cognitive variables suggests that these two constructs are independent, although further research is needed to confirm this finding. Further research also is needed to determine how analysts perform their analyses. Our findings that efficient time management seems to be related to expertise is consistent with earlier studies such as Hunton and McEwen (1997), but additional research is needed to determine how time management and expertise are related. These and other questions should be the focus of future research.

References

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_______, P. Frishkoff and P. Frishkoff. 1987. "How do financial analysts make decisions?: A process model of the investment screening decision." Accounting, Organizations and Society 12: 1-29.

_______ and W. Bradley. 1997. "Judgment and decision-making, part II: expertise, consensus and accuracy." In Behavioral Accounting Research Foundations and Frontiers. Ed. V. Arnold and S. Sutton. Sarasota, FL: American Accounting Association.

Hunton, J. and R. A. McEwen. 1997. "An assessment of the relation between analysts' earnings forecast accuracy, motivational incentives, and cognitive information search strategy." The Accounting Review 72: 497-515.

Stickel, S. 1992. "Reputation and performance among security analysts." Journal of Finance XLVII (December): 1811-1836.

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