How do Banking Analysts behave around Unanticipated News? Evidence from Operational Risk Event Announcements
54 Pages Posted: 15 Apr 2020
Date Written: March 22, 2020
We study earnings per share (EPS) forecast revision and accuracy of banking analysts around operational risk event announcements in U.S. banks from 1990 to 2016. We find that first announcements of operational risk events are more informative than their settlements announcements to banking analysts. Optimistic banking analysts revise their forecasts downwards more aggressively around operational risk disclosures, thereby improving forecast accuracy. We find consistent evidence linking competition among banking analysts with optimistic and inaccurate forecasts, suggesting that analysts seek to use inflated forecasts to curry favour and attract businesses to their brokerage house around the time of operational risk disclosures. Moreover, banking analysts have become less optimistic and more accurate in their reaction to operational risk disclosures during and following the global financial crisis with no effect of the Global Settlement of 2003. Overall, our results shed light on the determinants of optimism bias in banking analyst behaviour upon the arrival of unanticipated news.
Keywords: Operational risk, unanticipated news, banking analyst, forecast revision and accuracy, career concerns, analyst competition, optimism bias
JEL Classification: G14, G21, G41
Suggested Citation: Suggested Citation