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

36 Pages Posted: 2 Jun 2020

See all articles by Charles Chao Kang

Charles Chao Kang

Cornell University - Department of Accounting

Kenneth J. Merkley

Indiana University - Kelley School of Business - Department of Accounting

Roni Michaely

University of Geneva - Geneva Finance Research Institute (GFRI); Swiss Finance Institute

Joseph Pacelli

Indiana University - Kelley School of Business - Department of Accounting

Date Written: May 4, 2020

Abstract

Using the passage of Global Settlement as an exogenous shock, we show that disclosure requirements about analysts’ recommendation distributions incentivize analysts to manage their recommendation distributions to reduce concerns about perceived objectivity. Following the regulation, analysts frequently issue sell recommendations concurrently with buy recommendations, consistent with recommendation distribution management. Analysts’ propensity to provide concurrent sell recommendations increases as recommendation distributions deviate from historical benchmarks and when public scrutiny and visibility is high. Importantly, we find no evidence of such behavior prior to Global Settlement suggesting unintended consequences associated with the regulation. This behavior has important implications for investors: sell recommendations issued concurrently with buy recommendations provide a weaker investment signal, as they exhibit muted return reactions and are less likely to be supported by downward earnings forecast revisions. Overall, our results highlight the importance of analysts’ distributional incentives in influencing the quality of recommendations.

Suggested Citation

Kang, Charles and Merkley, Kenneth J. and Michaely, Roni and Pacelli, Joseph, Out of Balance: Do Analysts Issue Sell Recommendations to Manage their Recommendation Distributions? (May 4, 2020). Available at SSRN: https://ssrn.com/abstract=3592422 or http://dx.doi.org/10.2139/ssrn.3592422

Charles Kang

Cornell University - Department of Accounting ( email )

Ithaca, NY 14853
United States

Kenneth J. Merkley

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States

Roni Michaely

University of Geneva - Geneva Finance Research Institute (GFRI) ( email )

40 Boulevard du Pont d'Arve
Geneva 4, Geneva 1211
Switzerland

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Joseph Pacelli (Contact Author)

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States

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