'Consistent' Earnings Surprises

Abstract:     
We hypothesize that analysts with a bullish stock recommendation have an interest that they subsequently not be contradicted by negative firm-specific news. As a result, these analysts report conservative, i.e., 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 in order to avoid positive earnings surprises. Consistent with this notion, we find that stock recommendations significantly and positively predict subsequent earnings surprises, in particular, 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 157 basis points per month.

Number of Pages in PDF File: 36

Keywords: Stock recommendations, Biased earnings forecasts, Career concerns

JEL Classification: G12, G14, G23

working papers series