Analyst optimism, uncertainty and regulation: evidence from the Indian market

Abstract

PurposeThe study examines the effect of increased Economic Policy uncertainty on analyst optimism in the Indian market. The study also explores whether the SEBI Research Analyst Regulation, 2014, has effectively contained the optimistic nature of analysts.Design/methodology/approachThe study is based on firms in the Indian market. The sample period is 2003–2020. It runs a linear panel regression to measure the impact of Economic Policy uncertainty on the optimism level of analysts' forecasts and recommendations, controlling for firm fixed effects. Further, the impact of the SEBI Research Analyst Regulation, 2014, has been assessed with the help of the difference-in-difference approach.FindingsThe Economic Policy uncertainty is significantly and positively related to the analyst optimism, reflected in the forecast bias and recommendation in the Indian context. The experience of analysts and the age of the firm positively drive optimism. However, introducing the Research Analyst Regulation by SEBI led to a decline in analyst optimism. The regulation decoupled the analysts' compensation from brokerage service transactions. Thus, the results suggest that the regulation has effectively curbed the incentive to produce optimistic output.Originality/valueThis is the first study in the Indian market to assess the impact of uncertainty on analyst output. It also investigates the effectiveness of the first analyst-specific regulation in India, i.e. The Research Analyst Regulation, 2014.