Who Cares About Analyst Qualification Standards? The Role of Analyst Qualifications in Explaining Optimistic Bias and Investment Value in Analysts' Stock Recommendations
63 Pages Posted: 26 Apr 2007
Date Written: February 2007
Abstract
Regulation AC requires research reports include certifications by individual analysts that the views expressed accurately reflect their personal views. Other SEC reforms mandate analyst qualification standards intended to ensure competency of fundamental security analysis and valuation, and professional and ethical practice. This paper asks whether and how analyst qualifications are important to investors' education about the underlying bias and value in analysts' recommendations. I find that high-qualification analysts are less likely to provide overly optimistic recommendations deviating from fundamental valuations. I show also that investors do not recognize the full extent of the bias. Meanwhile, investors, conscious of the low credibility of buy recommendations, rely on individual qualifications of analysts when evaluating the related bias. Finally, evidence suggests that new qualification rules, coupled with early analyst-conflicts-of-interest regulations, have enhanced the role of analyst qualifications in mitigating recommendation bias and the ability of investors to recognize the extent of the bias.
Keywords: Analyst, Recommendation optimism, Regulation AC, Fundamental value
JEL Classification: C12, G12, G14, G28, G29
Suggested Citation: Suggested Citation