Out of Balance: Do Analysts Issue Sell Recommendations to Manage their Recommendation Distributions?

Abstract

The lack of objectivity and positive bias in sell-side equity recommendations is an ongoing concern for security regulators and investors. We examine whether analysts attempt to alleviate this concern by maintaining a more balanced distribution of investment recommendations across the stocks they cover. We find that when analysts issue buy recommendations, they are more likely to concurrently issue sell recommendations in the same short-term window to offset the distributional change from issuing a buy recommendation and reduce concerns about perceived objectivity. This practice is more pronounced when analysts’ recommendation distributions deviate from historical benchmarks and when analysts face greater public scrutiny. Consistent with such recommendations being driven by distributional incentives rather than information content, we find that sell recommendations issued concurrently with buy recommendations provide weaker investment signals: they exhibit weaker return reactions and are less likely to be supported by downward earnings forecast revisions. Overall, our results provide evidence on how analysts’ portfolio incentives can influence their recommendation behavior.

Keywords: Sell-side analysts, bias, stock recommendations