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The integrity of financial analysts: Evidence from asymmetric responses to earnings surprises

Research output: Contribution to journalArticle

  • Rui Lu
  • Wenxuan Hou
  • Henry R. Oppenheimer
  • Ting Jeffrey Zhang

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Original languageEnglish
Pages (from-to)761-783
JournalJournal of Business Ethics
Volume151
Issue number3
Early online date6 Jul 2016
DOIs
StateE-pub ahead of print - 6 Jul 2016

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 post-reform 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.

    Research areas

  • integrity, analust's response, conflicts of interest, earnings surprises

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