An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Yonca Ertimur
Stanford University

Jayanthi Sunder
Northwestern University

Shyam V Sunder
Northwestern University

Abstract: We study the relation between analysts’ forecast accuracy and recommendation profitability. First, we examine the association between forecast accuracy and recommendation profitability by partitioning analysts based on their expected conflicts of interest. We find a positive and significant association only for analysts with the lowest expected conflict of interest. Next, we study the impact of the recent regulatory initiatives to eliminate analysts’ conflicts of interest on the association between forecast accuracy and recommendation profitability. We find a positive and significant (insignificant) association between forecast accuracy and recommendation profitability in the post-regulatory reform period for top-tier investment bank analysts (non-investment bank analysts) who likely have high (low) degrees of conflict of interest. Due to the conflicting nature of these results, we are cautious in interpreting our results with respect to the effectiveness of the regulatory changes.

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