Analysts' Research Reports: Caveat Emptor

Abstract

In this paper, we investigate the dysfunctional incentives of security analysts and how they affect analysts’ earnings forecasts and investment recommendations. We argue that these incentives motivate analysts to issue overly optimistic earnings forecasts and investment recommendations and that the laxity of regulations governing the disclosure and dissemination of analysts’ research reports makes it difficult for investors (especially individual investors) to gain access to these research reports on a timely basis and correctly interpret their investment implications. We conclude with some precautions that investors can take to protect their best interests and a set of recommendations that regulators should implement to address the lack of transparency in analysts’ research reports.

Keywords: Analysts' Research Reports, Analysts' Incentives, Earnings forecasts, Investment Recommendations

JEL Classification: G11,G12,G14,G24