The Effects of Industry Peers’ Consistency on the Properties of Analysts’ Forecasts

In this paper, we empirically examine the effects of one specific characteristic that could facilitate earnings forecasting for sell-side financial analysts: the stability (consistency) over time of the industry
peers. We develop an accounting-based proxy for this, which we call industry peers’ accounting consistency (IPAC). First, we argue that a set of industry peers that is stable over time—with stability being
linked to their accounting choices relative to the target firm—improves the accuracy of sell-side analysts’ earnings forecasts, because previously developed heuristics for identifying industry peers and
forecasting earnings of target firms against their peers can continue to be used. Second, we conjecture
that higher peer stability over time decreases the dispersion of sell-side analysts’ earnings forecasts because more obvious peer choices are available. Consistent with our expectations, we find that IPAC is
significantly associated with higher accuracy and lower dispersion in analysts’ earnings forecasts.