Market Demand for Conservative Analysts
42 Pages Posted: 30 Jan 2007 Last revised: 15 Jun 2010
Date Written: January 19, 2010
Sell-side analysts, on balance, have incentives to emphasize good company news and downplay the bad, resulting in inefficient forecasts. We conjecture that this behavior generates a demand for forecasts from conservative analysts who unwind this pattern, at least in part, resulting in more efficient forecasts. To investigate, we introduce a measure of analyst conservatism and assess the market reaction to analysts’ forecast revisions conditioned on their past levels of conservatism. We find a stronger market reaction to forecast revisions by more conservative analysts, and that this result is heightened for companies with greater institutional investor following.
Keywords: Analysts, Conservatism, Earnings forecasts, Market reaction
JEL Classification: G14, G24, G29, M41
Suggested Citation: Suggested Citation