Changes in Analysts’ Stock Recommendations Following Regulatory Action Against Their Brokerage

Call, Andrew C.; Sharp, Nathan Y.; Wong, Paul A.

doi:10.2139/ssrn.3402180

Cited by 3 publications

(2 citation statements)

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“…A large body of research has identified factors that affect analyst performance, including individual analyst characteristics (M. B. Jacobs, Lys, & Neale, 1999;Mikhail, Walther, & Willis, 1997;Stickel, 1992), information environments (Byard, Darrough, Suh, & Tian, 2018;Hope, 2003;Lang & Lundholm, 1996), regulatory actions (Call, Sharp, & Wong, 2019), and peeranalyst performance (Do & Zhang, 2020). However, few studies have addressed the impact of natural disasters on analyst performance.…”

Section: Introductionmentioning

confidence: 99%

“…Hong and Kacperczyk (2010) document that competition imposes discipline on analysts so that they have less incentive to please managers, thereby lowering optimism bias. Call et al (2019) Call et al (2019document that regulatory oversight in the form of formal brokerage sanctions discipline sell-side research to produce less optimistic recommendations. made prior to the events, and therefore are less sensitive to the impact of the negative experiences.…”

Section: Introductionmentioning

confidence: 99%

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Disastrous Weather Events and Analysts' Earnings Forecasts.

Zhao¹

2020

Preprint

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We examine whether disastrous weather events affect the mood of sell-side analysts located near such disasters. Specifically, we examine the impact of seventeen severe weather events (1998 -2008) on analyst earnings forecasts and stock recommendations in the U.S. market. Our investigation compares forecasts issued by analysts in proximity to disaster zones with forecasts issued by analysts distant from disaster zones (i.e., difference in difference design). We show that conservative analysts who directly experience disastrous weather event are more likely to issue pessimistic earnings forecasts, whereas their less conservative counterparts are less likely to issue significantly more pessimistic earnings forecasts despite direct experience of a disastrous weather event. The impact of disastrous natural events on conservative analysts' pessimism strengthens over time. The effects of natural disaster risks on analysts' forecasting performance can be amplified during economic downturns. Our findings are consistent with the conjecture that earnings forecasts made immediately after the event occurrence are more dependent on information and judgements made prior to the events and are therefore less sensitive to the impact of negative experiences. We further find that analysts who are directly affected by disastrous weather events and who issue low-ball forecasts are more likely to issue negative (i.e., less accurate) forecasts in the period following the weather event. Our findings reveal that, despite being professional information agents, analysts are susceptible to the emotional and/or cognitive impacts of severe weather events. Lastly, we find that analysts' forecasts remain unchanged in the ninemonth period following a disastrous weather event. However, we find that in the longer period, 12 months, and 24 months after the event, affected analysts are actually less likely to downgrade their recommendation of a firm's stock. These findings are consistent with the view that analysts' personal experiences have less impact on their recommendations over time. This study contributes to the current literature on how information processing and opinions are affected by analysts' personal experiences. This study provides evidence for understanding the impact of disastrous weather events on market participants, namely sellside analysts, in an era of increasing climate risk.

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Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Disastrous Weather Events and Analysts' Earnings Forecasts.

Zhao¹

2020

Preprint

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Brokerage trading volume and analysts’ earnings forecasts: a conflict of interest?

2021

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Using unique new data, we examine whether brokerage trading volume creates a conflict of interest for analysts. We find that earnings forecast optimism is associated with higher brokerage volume, even controlling for forecast and analyst quality, recommendations, and target prices. However, forecast accuracy is also significantly associated with higher volume. When analysts change brokerage houses, they bring trading volume with them, influencing trading volume at the new brokerage. This indicates that analysts drive the volume effects we observe. Consistent with a reward for generating volume, brokerage houses are less likely to demote analysts who generate more volume. Finally, analysts strategically adjust forecast optimism based on expected volume impact. Analysts become more (less) optimistic if their optimistic forecasts in the prior year were more (less) successful at generating volume. However, consistent with higher costs to increasing accuracy, analysts do not update accuracy based on expected volume impact. Overall, our results are consistent with a brokerage trading volume conflict of interest moving analysts towards more optimistic earnings forecasts, despite the volume reward for accuracy.

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Due Diligence and Strategic Behavior

Bhattacharya¹,

Gupta

2021

SSRN Journal

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Changes in Analysts’ Stock Recommendations Following Regulatory Action Against Their Brokerage

Cited by 3 publications

References 34 publications

Disastrous Weather Events and Analysts' Earnings Forecasts.

Disastrous Weather Events and Analysts' Earnings Forecasts.

Brokerage trading volume and analysts’ earnings forecasts: a conflict of interest?

Due Diligence and Strategic Behavior

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