Political Contributions, Conservatism, and Analyst Behavior

Abstract:     
Using a unique dataset tracking the personal political contributions of sell-side equity analysts, we show that analysts who contribute primarily to the Republican Party adopt a more conservative forecasting style. Relative to other analysts, they are more cautious in incorporating new information into their earnings forecasts and stock recommendations. Their forecast revisions are smaller and less likely to be bold, and their recommendations contain modest upgrades and downgrades. Further, those forecasts are more accurate since forecast conservatism partially mitigates the adverse effects of known analyst biases. Market participants, however, do not fully recognize the potential link between political contributions and forecast accuracy. The market reaction following revisions by analysts who contribute primarily to the Republican Party is weaker even though they are more accurate. Taken together, our results suggest that conservatism, as captured by the personal political contributions of sell-side equity analysts, influences their forecasting styles and the information dissemination process.

Number of Pages in PDF File: 65

working papers series