The Effects of Industry Peers’ Consistency on the Properties of Analysts’ Forecasts

Abstract

In this paper, we empirically examine the effects of one specific characteristic that could facilitate earnings forecasting for sell-side financial analysts: the stability (consistency) over time of industry peers. We develop an accounting-based proxy for this, which we call industry peers’ accounting consistency (IPAC). First, we argue that a set of industry peers that is stable over time—with stability being linked to their accounting choices relative to the target firm—improves the accuracy of sell-side analysts’ earnings forecasts, because previously developed heuristics for identifying industry peers and forecasting earnings of target firms against their peers can continue to be used. Second, we conjecture that higher peer stability over time decreases the dispersion of sell-side analysts’ earnings forecasts because more obvious peer choices are available. Consistent with our expectations, we find that IPAC is significantly associated with higher accuracy and lower dispersion in analysts’ earnings forecasts.