This paper investigates whether sophisticated investors rely more on analyst forecasts than on time-series model forecasts in forming expected earnings. Although analyst forecasts are generally more accurate than time-series model forecasts (e.g., O'Brien [1988]), analyst forecasts are not clearly superior to time-series model forecasts as a proxy for expected earnings (e.g., Brown et al. [1987b]). Recent research has concluded that earnings expectations reflected in stock prices at least partially reflect a seasonal random walk (SRW) model (Bernard and Thomas [1990] and Abarbanell and Bernard [1992]). In particular, Ball and Bartov [1996] find that market earnings expectations incorporate the sign of the serial correlation in seasonally differenced earnings but underestimate the correlation magnitude (see also Maines and Hand [1996]). These findings suggest that at least some market participants ignore public information in forming expected earnings; I examine whether information usage is correlated with investor sophistication and/or the degree to which investors are informed.

We examine the effects of analysts' celebrity on investor reaction to earnings forecast revisions. We measure celebrity as the quantity of media coverage analysts receive in sources included in the Dow Jones Interactive database, and find that media coverage is positively related to investor reaction to forecast revisions. The effect of celebrity on the reaction to forecast revisions remains significant after controlling for forecast performance variables examined in prior studies (ex post forecast accuracy, ex ante accuracy, award status, and other variables shown to be related to forecast accuracy). While these results are consistent with the familiarity of the analyst's name affecting the market reaction, we cannot rule out that our measure of celebrity is correlated with error in the performance measures we examine and/or correlated with other unexamined dimensions of forecast performance. A content analysis of a random subsample of the media coverage of our sample analysts suggests that our findings likely are not due to the increased availability of forecast revisions. Finally, an investigation of the excess returns around the quarterly earnings announcement date suggests that market participants react too strongly to forecast revisions issued by analysts with high levels of media coverage. Taken together, these findings suggest that an analyst's level of media coverage can affect the initial market reaction to his forecast revisions.

Michael B. Mikhail, Beverly R. Walther, Richard H. Willis, Do Security Analysts Improve Their Performance with Experience?, Journal of Accounting Research, Vol. 35, Studies on Experts and the Application of Expertise in Accounting, Auditing, and Tax (1997), pp. 131-157