Security Analysts' Career Concerns and Herding of Earnings Forecasts

Abstract

Several theories of reputation and herding (see, e.g., Scharfstein and Stein (1990)) suggest that herding among agents should vary with career concerns. Our goal in this paper is to document whether such a link exists in the labor market for security analysts. Specifically, we look at the relationship between an analyst's job tenure (a proxy for career concerns) and various measures of stock earnings forecast performance. We establish the following key results. (1) Older analysts are more likely to produce earnings forecasts of firms before younger ones. (2) Their forecasts also deviate more from the consensus forecast than their younger counterparts. We argue that these results are consistent with some reputational models of herding. We also establish a number of auxiliary findings regarding the relationship between forecast accuracy and frequency of forecast revisions with job tenure.

CEO Tenure and Risk-Taking

“…Second and related, the declining of career concerns with longer tenure is based on the notion that newly-appointed CEOs care more about their future careers because they have more years to work. This follows the convention in the literature (e.g., Hong et al, 2000;Cremers & Palia, 2010). Theoretically speaking, however, the sources of career concerns may be beyond this mechanical mechanism.…”

“…In contrast, the empirical work on the relationship between risk-taking and implicit incentives, in particular the incentives of managers to secure or advance their careers, is significantly less despite the arguments that career concerns matter for risk-taking incentives (e.g., Hermalin, 1993;Holmstrom, 1999;Chen, 2013;Fu & Li, 2014). Because newly promoted CEOs may be more concerned about their career prospects than long-serving CEOs, prior studies have used the tenure of CEOs as a proxy for career concerns (e.g., Gibbons and Murphy, 1992;Hong et al, 2000;Milbourn, 2003;Cremers & Palia, 2010). In this study, we extend this line of work by studying the effect of CEO tenure on risk-taking.…”

“…A significant number of studies examine the relationship between career concerns and herding (e.g., Hong et al, 2000;Lamont, 2002), which is a form of relative risk-taking rather than risk-taking itself. A small strand of studies employs termination risk or CEO age to proxy for career concerns and finds mixed evidence on their effects on risk-taking (Chevalier& Ellison, 1999;Chakraborty et al, 2007;Hu et al, 2011;Garfinkel et al, 2013;Serfling, 2013).…”

Analyst Behaviour: The Geography of Social Interaction

“…Double counting has tried to be eliminated by only considering domestic stocks from the perspective of each stock exchange. Empirical works of Hong et al (2000) and Krishnan et al (2006) show that equity sell-side analysts 2 herd while providing earnings forecasts. Zitzewitz (2001), Bernhardt et al (2006) and Naujoks et al (2009) nd an anti-herding behaviour in the same context.…”

“…I base this hypothesis on the incentive structure of analysts who are judged by their relative performance (Hong et al, 2000, Hong and Kubik, 2003, Chen and Jiang, 2006. This means that in times of a bull market they try to stand up from the crowd in order to distinguish themselves from their competitors (Zwiebel, 1995).…”