Upgrades Vs. Downgrades: The Impact on Access to Information and Analysts' Forecast Accuracy

47 Pages Posted: 23 Feb 2004

See all articles by Shuping Chen

Shuping Chen

University of Texas at Austin - Red McCombs School of Business

Dawn A. Matsumoto

University of Washington - Department of Accounting

Date Written: November 2003

Abstract

This study explores recent SEC concerns and anecdotal reports that managers provide or deny analysts access to information based on the favorableness of their stock recommendations. We examine the relative forecast accuracy of analysts before and after a change in their recommendation (either upward or downward) under the assumption that increases (decreases) to management-provided information will increase (decrease) analysts' relative forecast accuracy. We find that, after controlling for the age of forecasts: 1) analysts who upgrade their recommendations experience a significant increase in their relative forecast accuracy, 2) analysts who downgrade their recommendations do not experience a significant decrease in their relative forecast accuracy, but 3) downgrading analysts improve less in forecast accuracy than upgrading analysts following their respective recommendation change. In addition, we find that the greater increase in relative accuracy for the upgrade group compared to the downgrade group exists prior to the passage of Regulation FD but not after. Finally, we find that the proportion of analyst forecasts issued independently of other analysts (i.e., on days when other analysts do not forecast) declines more following a downgrade relative to an upgrade, suggesting that analysts receive less private information/rely more on public information following a downgrade relative to an upgrade. The combined results are consistent with analysts receiving relatively less management-provided information following a downgrade relative to an upgrade.

Keywords: financial analysts, forecast accuracy, analysts' incentives, corporate disclosure, regulation fair disclosure

JEL Classification: M41, G24, G29, G38, K22

Suggested Citation

Chen, Shuping and Matsumoto, Dawn, Upgrades Vs. Downgrades: The Impact on Access to Information and Analysts' Forecast Accuracy (November 2003). Available at SSRN: https://ssrn.com/abstract=468723 or http://dx.doi.org/10.2139/ssrn.468723

Shuping Chen

University of Texas at Austin - Red McCombs School of Business ( email )

Austin, TX 78712
United States
521.471.5328 (Phone)

Dawn Matsumoto (Contact Author)

University of Washington - Department of Accounting ( email )

224 Mackenzie Hall, Box 353200
Seattle, WA 98195-3200
United States
206-543-4454 (Phone)
206-685-9392 (Fax)

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