The Association between the Legal and Financial Reporting Environments and Forecast Performance of Individual Analysts

We test the ability of analyst characteristics to explain relative forecast accuracy across legal origins (common law versus civil law). Common†law countries generally have more effective corporate governance mechanisms, including stronger investor protection laws and inputs provided through higher†quality financial reporting systems. In this type of environment, we predict that analysts with superior ability and resources in common†law countries will more consistently outperform their peers because appropriate market†based incentives exist. In civil†law countries, where the demand for earnings information is reduced because of weaker corporate governance mechanisms and lower†quality financial reporting, we predict that analysts with superior ability will less consistently provide superior forecasts. Results are consistent with our expectations and suggest an association between legal and financial reporting environments and analysts' forecast behavior.