Who Cares About Analyst Qualification Standards? The Role of Analyst Qualifications in Explaining Optimistic Bias and Investment Value in Analysts' Stock Recommendations

63 Pages Posted: 26 Apr 2007

See all articles by Jian Cao

Jian Cao

Florida Atlantic University

Date Written: February 2007

Abstract

Regulation AC requires research reports include certifications by individual analysts that the views expressed accurately reflect their personal views. Other SEC reforms mandate analyst qualification standards intended to ensure competency of fundamental security analysis and valuation, and professional and ethical practice. This paper asks whether and how analyst qualifications are important to investors' education about the underlying bias and value in analysts' recommendations. I find that high-qualification analysts are less likely to provide overly optimistic recommendations deviating from fundamental valuations. I show also that investors do not recognize the full extent of the bias. Meanwhile, investors, conscious of the low credibility of buy recommendations, rely on individual qualifications of analysts when evaluating the related bias. Finally, evidence suggests that new qualification rules, coupled with early analyst-conflicts-of-interest regulations, have enhanced the role of analyst qualifications in mitigating recommendation bias and the ability of investors to recognize the extent of the bias.

Keywords: Analyst, Recommendation optimism, Regulation AC, Fundamental value

JEL Classification: C12, G12, G14, G28, G29

Suggested Citation

Cao, Jian, Who Cares About Analyst Qualification Standards? The Role of Analyst Qualifications in Explaining Optimistic Bias and Investment Value in Analysts' Stock Recommendations (February 2007). Available at SSRN: https://ssrn.com/abstract=981068 or http://dx.doi.org/10.2139/ssrn.981068

Jian Cao (Contact Author)

Florida Atlantic University ( email )

777 Glades Rd.
Boca Raton, FL 33431
United States
561-297-3727 (Phone)

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