Analyst Optimism and Incentives under Market Uncertainty
51 Pages Posted: 1 Oct 2015 Last revised: 14 Jul 2017
Date Written: December 1, 2016
We examine how analysts’ changing incentives driven by changes in market uncertainty affect analyst output, under a simple utility-maximizing framework. Analysts issue more optimistically biased forecasts and buy recommendations under high market uncertainty (VIX). The lower reputational costs and larger benefits of optimistic output explain the increased optimistic output: Analysts are less likely to be penalized for inaccuracy and can stimulate more trading activity from optimistically biased output when market uncertainty is high. We find that the likelihood of analysts’ turnover decreases, while the trading volume associated with optimistic output increases, with VIX. No evidence suggests that analysts’ self-selection affects our findings on optimism and uncertainty.
Keywords: Sell-side Analysts; Optimism; Market Uncertainty; Reputation
JEL Classification: G24, G29, G14, M40
Suggested Citation: Suggested Citation