Analysts' knowledge structure and performance

This article examines the effect of financial analysts' knowledge structure on their forecast performance based on manually collected data of 1590 sell-side financial analysts' educational background. The longer the period of higher education in one major, the profounder the knowledge in a specific area (Ng & Feldman, Personnel Psychology, 62, 2009, 89), and the less likely it is grasped by self-education outside university. Thus, we argue that analysts who study the same (different) major in undergraduate and postgraduate periods have deeper (wider) knowledge and better (poorer) understanding to a major-related industry (Brown et al., Journal of Accounting Research, 53, 2015, 1). Our results show that financial analysts with deeper knowledge tend to release more accurate earnings forecasts and their earnings revisions evoke larger market reactions. The forecast advantage of analysts with deeper knowledge is more pronounced when firms' business is more concentrated or more relevant to analysts' knowledge. We conclude that the knowledge structure cultivated by higher education can partially explain analysts' job performance and deeper knowledge can bring better industry understanding besides work experience (Bradley et al., The Journal of Finance, 72, 2017, 751).