Why are Recommendations Optimistic? Evidence from Analysts’ Coverage Initiations
51 Pages Posted: 18 Jun 2007 Last revised: 16 Oct 2013
Date Written: June 1, 2010
We examine the long-term stock performance of analyst recommendations and the properties of accompanied earnings forecasts for initiations and non-initiations to evaluate the reporting, selection, and processing explanations for analyst optimism. We find that Strong Buy and, to a lesser degree, Buy initiation recommendations under-perform their non-initiation counterparts after controlling for analyst, brokerage and firm characteristics associated with the initiation decision and expected long-term stock returns. Yet, earnings forecasts accompanying Strong Buy and Buy initiation recommendations are less optimistic and more accurate than those accompanying non-initiation recommendations. Our findings suggest that conflicts of interest (i.e., the reporting explanation) are the dominant source for favorable recommendations.
Keywords: Analysts, Conflicts of Interest, Selection Bias, Coverage Initiations
JEL Classification: G29, G12, G14
Suggested Citation: Suggested Citation