Are Analyst Recommendations Biased? Evidence from Corporate Bankruptcies

47 Pages Posted: 28 Aug 2005

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

Narayanan Jayaraman

Georgia Institute of Technology - Scheller College of Business

Abstract

We test whether a bias exists in analyst recommendations for firms that file for bankruptcy during 1995-2001. We fail to find over-optimism in analyst recommendations, including those of affiliated analysts. Our multivariate analysis of the market reaction to changes in analyst recommendations indicates that prior affiliation exerts no impact on either returns or trading volume. Nor do we find that the market views recommendation upgrades by affiliated analysts as biased since there is no price reversal following these recommendation changes. Overall, our results suggest that recently passed legislation to reduce analysts' conflicts of interest might be an overreaction.

Keywords: Analyst optimism, recommendations, analyst bias, bankruptcy

JEL Classification: G24, G32

Suggested Citation

Clarke, Jonathan and Ferris, Stephen P. and Lee, Jinsoo and Jayaraman, Narayanan, Are Analyst Recommendations Biased? Evidence from Corporate Bankruptcies. Journal of Financial and Quantitative Analysis, Forthcoming, Available at SSRN: https://ssrn.com/abstract=786444

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

Narayanan Jayaraman

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

800 West Peachtree St.
Atlanta, GA 30308
United States
404-894-4389 (Phone)
404-894-6030 (Fax)

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