Self-Selection and Analyst Coverage

Posted: 25 Nov 1996

Date Written: July 1996


We examine implications of the conjecture that analysts announce recommendations and forecasts selectively, based upon whether their information about the firm is favorable. We propose this as an alternative to the common assumption that analysts introduce bias into their forecasts, and provide empirical evidence on this alternative. An effect of selective reporting is that ex post observed distributions of earnings forecast errors appear over-optimistic, even if each forecast is unbiased ex ante. This occurs because high forecasts are both more likely to be observed and more likely to be over-optimistic than low forecasts, for any given realization. We find strong evidence supporting the self-selection conjecture in analyst recommendations, and generally consistent evidence in analyst forecast errors. We also document that analysts avoid issuing negative information by sparse use of sell recommendations and by delaying downgrades, but not by avoiding downgrades altogether.

JEL Classification: G29, G24, D84

Suggested Citation

McNichols, Maureen F. and O'Brien, Patricia C., Self-Selection and Analyst Coverage (July 1996). Available at SSRN:

Maureen F. McNichols (Contact Author)

Stanford University ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
650-723-0833 (Phone)

Patricia C. O'Brien

University of Waterloo ( email )

200 University Avenue, West
Waterloo, Ontario N2L 3G1
1-519-888-4567 (Phone)
1-519-888-7562 (Fax)

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