The Integrity of Financial Analysts: Evidence from Asymmetric Responses to Earnings SurprisesJournal of Business Ethics
AbstractThis 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.
CopyrightCopyright © 2016, Springer
Citation InformationRui Lu, Wenxuan Hou, Henry Oppenheimer and Ting Zhang. "The Integrity of Financial Analysts: Evidence from Asymmetric Responses to Earnings Surprises" Journal of Business Ethics (2016)
Available at: http://works.bepress.com/ting-zhang/11/