Why are Recommendations Optimistic? Evidence from Analysts’ Coverage Initiations

51 Pages Posted: 18 Jun 2007 Last revised: 16 Oct 2013

See all articles by Yonca Ertimur

Yonca Ertimur

University of Colorado at Boulder - Department of Accounting

Frank Zhang

Yale School of Management

Volkan Muslu

C.T. Bauer College of Business University of Houston

Date Written: June 1, 2010

Abstract

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

Ertimur, Yonca and Zhang, Frank and Muslu, Volkan, Why are Recommendations Optimistic? Evidence from Analysts’ Coverage Initiations (June 1, 2010). Review of Accounting Studies 16, 2011. Available at SSRN: https://ssrn.com/abstract=993563 or http://dx.doi.org/10.2139/ssrn.993563

Yonca Ertimur

University of Colorado at Boulder - Department of Accounting ( email )

419 UCB
Boulder, CO 80309-0419
United States

Frank Zhang

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

Volkan Muslu (Contact Author)

C.T. Bauer College of Business University of Houston ( email )

4750 Calhoun Road
Houston, TX 77204
United States
713 7434924 (Phone)

Register to save articles to
your library

Register

Paper statistics

Downloads
530
Abstract Views
2,397
rank
51,492
PlumX Metrics