Working on the Weekend: Do Analysts Strategically Time the Release of Their Recommendation Revisions?

Abstract

We examine whether financial analysts strategically time the announcement of their recommendation revisions consistent with their incentives to maintain relations with management. We provide evidence that investor and media attention to recommendation revisions is reduced on weekends, which analysts can exploit to strategically time the release of their revisions. We find that downgrades are a higher proportion of weekend revisions than weekday revisions and that analysts with characteristics that suggest they possess the strongest incentives to maintain favor with management are more likely to downgrade on the weekend. In contrast, analysts absent these characteristics are more likely to release downgrades during the week, consistent with these analysts being driven primarily by other incentives, such as the timely release of their recommendation and garnering media attention. We also present evidence suggesting that strategic disclosure of recommendation downgrades is associated with greater access to management on public earnings conference calls.

Inside the “Black Box” of Sell‐Side Financial Analysts

“…Two‐thirds of analysts indicate their standing in analyst rankings or broker votes is very important, while fewer than 5% say it is not important to their compensation. Experienced analysts and analysts from large brokerage houses are more likely to say their standing in analyst rankings or broker votes is important to their compensation, consistent with evidence that these analysts are more likely to become II All‐Stars (Rees, Sharp, and Wong []).…”

“…We define each of these variables based on award status on the date we administered the survey. Following prior research (Bradshaw, Huang, and Tan [], Rees, Sharp, and Wong []), we use Thomson One Banker to determine whether analysts’ employers provide underwriting of debt or equity issuances ( I_Bank ). We code the last two indicator variables, Retail_Focus and HF_Focus , based on the survey responses compiled in table , to capture the extent to which retail investing clients and hedge funds are important to the analyst's employer.…”

Strategic behavior by market intermediaries

“…In an extended review of the economics literature on quality disclosures, Dranove and Jin (2010) presents, as a prototypical example of evaluator conflict of interest, how Arthur Anderson's duties as an auditor were compromised by its other business relationships with Enron, an important client. Research in other settings finds systematic patterns of bias and deference: Gurun and Butler (2012) find that local television stations favorably slant reports about local advertisers, Waguespack and Sorenson (2011) find that high status film distributors receive more lenient age appropriateness ratings, Bennett, Pierce, Snyder, and Toffel (2013) find that service stations facing competition are more likely to falsely certify customer vehicle inspections when they face stiff competition, and Rees, Sharp, and Wong (2017) find that securities analysts are more likely to release negative revisions to their recommendations on weekends when investor and media attention is reduced.…”

Changes in analysts’ stock recommendations following regulatory action against their brokerage

“…For example, analysts whose brokerages provide investment banking services tend to issue more optimistic stock recommendations (Dugar and Nathan 1995;Lin and McNichols 1998) and are slower to downgrade their recommendations relative to other analysts (O'Brien et al 2005). Further, analysts with ties to investment banking departments are more likely to release recommendation downgrades during times of low investor attention to maintain favorable relations with management (Rees, Sharp, and Wong 2017). Analysts also engage in strategic behaviors to gain access to management (Dugar and Nathan 1995;Ke and Yu 12 2006;Mayew 2008;Mayew, Sharp, and Venkatachalam 2013;Brown et al 2015).…”