The Integrity of Financial Analysts: Evidence from Asymmetric Responses to Earnings Surprises

Rui Lu, Wenxuan Hou, Henry Oppenheimer and Ting Zhang
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Rui Lu: Sun Yat-sen University
Henry Oppenheimer: University of Rhode Island
Ting Zhang: University of Dayton

Journal of Business Ethics, 2018, vol. 151, issue 3, No 10, 783 pages

Abstract: Abstract This paper investigates the integrity of financial analysts by examining their recommendation responses to large quarterly earnings surprises. Although there is no significant difference in recommendation changes between affiliated and unaffiliated analysts in response to positive earnings surprises, affiliated analysts are more reluctant than unaffiliated analysts to downgrade stock recommendations in response to negative earnings surprises. The evidence implies that conflicts of interest undermine the integrity of financial analysts. We further examine the effects of reputation concern and the Global Research Analyst Settlement as informal and formal mechanisms, on restoring analysts’ integrity. The results show that the positive bias in recommendations remains prevalent for affiliated analysts from reputable investment banks and for the postreform period. Finally, evidence from market reactions suggests that investors fail to notice that analysts’ integrity is compromised by conflicts of interest and are misled by affiliated analysts.

Keywords: Integrity; Analysts’ response; Conflicts of interest; Earnings surprises (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (2)

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DOI: 10.1007/s10551-016-3244-1

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