Financial Analysts' Heterogeneous Earnings Expectations and Their Stock Recommendations

Posted: 2 Mar 2003

See all articles by Steven Lustgarten

Steven Lustgarten

City University of New York - Stan Ross Department of Accountancy

Charles Tang

Pace University - Lubin School of Business

Abstract

In this study we test whether financial analysts' use their earnings forecasts to make stock recommendations. We hypothesize that if analysts use earnings forecasts as a basis for stock recommendations, the likelihood of a buy (sell) recommendation ought to increase (decrease) when the analyst's earnings forecast becomes more optimistic (pessimistic) relative to the market's expectation. The data supports this hypothesis. We also test the extent to which analysts' stock recommendations are based on public and/or on private earnings information. Private information is measured as the difference between the analysts own earnings forecast and the consensus forecasts of other analysts. Public information is measured as the difference between the consensus forecast and the random walk forecast. Our data show that stock recommendations are related to both private and public earnings information, private information is more important. We also find that the relationship between recommendations and forecasts is stronger where earnings are more value relevant. Factors such as higher earnings persistence and growth opportunities, lower market risk and larger firm size make stock recommendations more responsive to earnings forecasts. Stock recommendations are related to forecasted earnings surprises even when the forecast revision is held constant.

Keywords: stock recommendation, earnings forecast, financial analyst, PROBIT

JEL Classification: M41, G29

Suggested Citation

Lustgarten, Steven and Tang, Charles Ya B., Financial Analysts' Heterogeneous Earnings Expectations and Their Stock Recommendations. Pace University Accounting Research Paper No. 2003/01. Available at SSRN: https://ssrn.com/abstract=373460

Steven Lustgarten (Contact Author)

City University of New York - Stan Ross Department of Accountancy ( email )

One Bernard Baruch Way
P.O. Box B12-225
New York, NY 10010
United States
212-802-6444 (Phone)

Charles Ya B. Tang

Pace University - Lubin School of Business ( email )

1 Pace Plaza
New York, NY 10038-1502
United States

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