Standing Out from the Crowd: The Real Effects of Outliers
55 Pages Posted: 12 May 2016 Last revised: 2 Mar 2021
Date Written: March 1, 2021
We examine the real effects of outlier opinions in the context of extreme analyst optimism. Instead of ignoring them as noise, managers appear to respond to the arrival of outlier forecasts with more aggressive earnings management. When identifying potential channels, we find that an outlier forecast subsequently generates more optimistic forecasts by peer analysts and greater market reactions. Further analyses reveal that issuing outlier forecast engenders career benefit, increasing an analyst’s chance to cover more important clients of his employer. Outlier forecasts are also more likely to take place when an analyst’s reputation cost is lower. These findings suggest that the propensity for expressing extreme views is situational, and that personal incentives are the likely cause at play.
Keywords: outliers; extreme optimism; financial analyst; corporate governance
JEL Classification: G34, M41, G24
Suggested Citation: Suggested Citation