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Do Sell-Side Stock Analysts Exhibit Escalation of Commitment?

53 Pages Posted: 20 Jun 2008 Last revised: 8 May 2012

John L. Beshears

Harvard Business School; National Bureau of Economic Research (NBER)

Katherine L. Milkman

University of Pennsylvania - The Wharton School

Date Written: April 18, 2010

Abstract

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.

Keywords: Stock Analysts, Forecasting, Escalation

JEL Classification: D00, G10

Suggested Citation

Beshears, John L. and Milkman, Katherine L., Do Sell-Side Stock Analysts Exhibit Escalation of Commitment? (April 18, 2010). Available at SSRN: https://ssrn.com/abstract=1147763 or http://dx.doi.org/10.2139/ssrn.1147763

John Leonard Beshears

Harvard Business School ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Katherine L. Milkman (Contact Author)

University of Pennsylvania - The Wharton School ( email )

Philadelphia, PA 19104
United States

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