Why are recommendations optimistic? Evidence from analysts’ coverage initiations

Yonca Ertimur (), Volkan Muslu () and Frank Zhang ()
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Yonca Ertimur: Duke University
Volkan Muslu: University of Texas at Dallas
Frank Zhang: Yale University

Review of Accounting Studies, 2011, vol. 16, issue 4, No 1, 679-718

Abstract: Abstract We examine the long-term stock performance of analyst recommendations and the properties of accompanied earnings forecasts for initiations and non-initiations to evaluate the reporting, selection, and processing explanations for analyst optimism. We find that Strong Buy and, to a lesser degree, Buy initiation recommendations underperform their non-initiation counterparts after controlling for analyst, brokerage, and firm characteristics associated with the initiation decision and expected long-term stock returns. Yet, earnings forecasts accompanying Strong Buy and Buy initiation recommendations are less optimistic and more accurate than those accompanying non-initiation recommendations. Our findings suggest that conflicts of interest (that is, the reporting explanation) are the dominant source for favorable recommendations.

Keywords: Analysts; Conflicts of interest; Selection bias; Coverage initiations (search for similar items in EconPapers)
JEL-codes: G12 G14 G29 (search for similar items in EconPapers)
Date: 2011
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DOI: 10.1007/s11142-011-9163-6

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