'Consistent' Earnings Surprises
Cornell University - Dyson School of Applied Economics and Management; Korea University - Department of Finance
Florida State University
London School of Economics & Political Science (LSE)
May 5, 2014
We hypothesize that analysts with a bullish stock recommendation have an interest in not being subsequently contradicted by negative firm-specific news. As a result, these analysts report downward-biased earnings forecasts so that the company is less likely to experience a negative earnings surprise. Analogously, analysts with a bearish recommendation report upward biased earnings forecasts so that the firm is less likely to experience a strong positive earnings surprise. Consistent with this notion, we find that stock recommendations significantly and positively predict subsequent earnings surprises, as well as narrow beats versus narrow misses. This predictability is concentrated in situations where the motivation for such behavior is particularly strong. Stock recommendations also predict earnings-announcement-day returns. A long-short portfolio that exploits this predictability earns abnormal returns of 125 basis points per month.
Number of Pages in PDF File: 54
Keywords: Stock recommendations, Biased earnings forecasts, Career concerns
JEL Classification: G14, G18, G20working papers series
Date posted: March 15, 2010 ; Last revised: May 6, 2014
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