'Self-Fulfilling' Stock Recommendations

Byoung-Hyoun Hwang, Dong Lou
2010 Social Science Research Network  
This paper tests the hypothesis that analysts report biased earnings estimates in order to enhance their stock recommendation performance. In particular, we argue that analysts with optimistic (pessimistic) stock recommendations tend to issue negatively (positively) biased earnings forecasts so that the underlying firms are more likely to beat (miss) the consensus forecasts and thus have higher (lower) stock returns after these recommendations are issued. Consistent with this hypothesis, we
more » ... that average stock recommendations prior to earnings announcements significantly and positively predict subsequent earnings surprises. In addition, the predictability is substantially stronger when the net benefits associated with such strategic behavior are larger, for example, among firms with lower analyst coverage. JEL Classification: G12, G14, G23
doi:10.2139/ssrn.1571619 fatcat:aba4gtn6hzcjbolweg6xn3gqfq