Peering into a Cloudy Crystal Ball: Analysts Recommendations Preceding Bankruptcy

46 Pages Posted: 30 Dec 2003

See all articles by Jonathan Clarke

Jonathan Clarke

Georgia Institute of Technology - Scheller College of Business

Stephen P. Ferris

University of Missouri at Columbia - Department of Finance

Jinsoo Lee

KDI School of Public Policy and Management

Date Written: June 2003

Abstract

In this study we test for the presence of over-optimism in analyst recommendations for a sample of bankrupt firms over the 1995-2001 period. Our findings indicate a pervasive over-optimism in analysts' recommendations. This recommendation bias exists even for firms that are unable to reorganize and must liquidate. Our results indicate that the probability of revision in recommendations does not depend on the analyst reputation, the investment bank's reputation, or existing business ties between the investment bank and the bankrupt firm. Further, the extent of the bias is not attenuated by prior financial signals, such as the existence of a qualified opinion or changes in the firm's auditor. Nevertheless, the market appears to recognize the existence of this bias and ignores analyst upgrades. It only reacts when analysts act against their bias and issue a recommendation downgrade. These findings suggest that recently passed regulations and laws to reduce analyst conflict of interest might be unnecessary to the operation of an informationally efficient equities market.

Keywords: Analysts, recommendations, bankruptcy

JEL Classification: G24, G32

Suggested Citation

Clarke, Jonathan and Ferris, Stephen P. and Lee, Jinsoo, Peering into a Cloudy Crystal Ball: Analysts Recommendations Preceding Bankruptcy (June 2003). CORI Working Paper No. 03-03, Available at SSRN: https://ssrn.com/abstract=481946 or http://dx.doi.org/10.2139/ssrn.481946

Jonathan Clarke

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States
404-894-4929 (Phone)
404-894-6030 (Fax)

HOME PAGE: http://mgt.gatech.edu/directory/clarke.html

Stephen P. Ferris (Contact Author)

University of Missouri at Columbia - Department of Finance ( email )

214 Middlebush Hall
Columbia, MO 65211
United States
573-882-6272 (Phone)
573-884-6296 (Fax)

Jinsoo Lee

KDI School of Public Policy and Management ( email )

P.O. Box 184
Seoul, 130-868
Korea, Republic of (South Korea)
822-3299-1060 (Phone)
822-968-5072 (Fax)

HOME PAGE: http://www.kdischool.ac.kr

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
245
Abstract Views
3,515
rank
135,761
PlumX Metrics