Diligence, objectivity, quality and accuracy

Purpose - The authors provide a general framework of behavior under asymmetric information and develop indices of diligence, objectivity and quality by an analyst and analyst firm about a studied firm, and relate them to the accuracy of its forecasts. The authors test the associations of these indices with time. Design/methodology/approach - The test of Public Information versus Non-Public Information Models provides the index of diligence, which equals one minus thep-value of the Hausman Specification Test of Ordinary Least Squares (OLS) versus Two Stage Least Squares (2SLS). The test of Objectivity versus Non-Objectivity Models provides the index of objectivity, which equals thep-value of the Wald Test of zero coefficients versus non-zero coefficients in 2SLS regression of the earnings forecast residual. The exponent of the negative of the standard deviation of the residuals of the analyst forecast regression equation provides the index of analytical quality. Each index asymptotically equals the Bayesianex postprobability, by the analyst and analyst firm about the studied firm, of the relevant behavior. Findings - The authors find thatex postaccuracy is a statistically and economically significant increasing function of the product of the indices of diligence, objectivity and quality by the analyst and analyst firm about the studied firm, which asymptotically equals the Bayesianex postjoint probability of diligence, objectivity and quality. The authors find that diligence, objectivity, quality and accuracy did not improve with time. Originality/value - There has been no previous work done on the systematic and objective characterization and joint analysis of diligence, objectivity and quality of analyst forecasts by an analyst and analyst firm for a studied firm, and their relation with accuracy. This paper puts together the frontiers of various disciplines.