Do Sell-Side Stock Analysts Exhibit Escalation of Commitment?
John Leonard Beshears
National Bureau of Economic Research (NBER)
Katherine L. Milkman
University of Pennsylvania - The Wharton School
April 18, 2010
This paper presents evidence that when an analyst makes an out-of-consensus forecast of a company’s quarterly earnings that turns out to be incorrect, she escalates her commitment to maintaining an out-of-consensus view on the company. Relative to an analyst who was close to the consensus, the out-of-consensus analyst adjusts her forecasts for the current fiscal year’s earnings less in the direction of the quarterly earnings surprise. On average, this type of updating behavior reduces forecasting accuracy, so it does not seem to reflect superior private information. Further empirical results suggest that analysts do not have financial incentives to stand by extreme stock calls in the face of contradictory evidence.
Number of Pages in PDF File: 53
Keywords: Stock Analysts, Forecasting, Escalation
JEL Classification: D00, G10working papers series
Date posted: June 20, 2008 ; Last revised: May 8, 2012
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