Seemingly inconsistent analyst revisions

Michael Iselin; Min Park; Andrew Van Buskirk

doi:10.1016/j.jacceco.2020.101339

Seemingly inconsistent analyst revisions

Michael Iselin, Min Park, Andrew Van Buskirk

Accounting

Research output: Contribution to journal › Article › peer-review

6 Scopus citations

Abstract

In about 20%–30% of cases where an analyst revises two outputs (namely, earnings estimates, target prices, or stock recommendations) simultaneously, the two estimates are revised in opposite directions. Existing literature notes that these inconsistent outputs are widespread, and concludes that they are lower-quality, driven by strategic bias, and are viewed as less valid by investors. We find that these characterizations are generally inaccurate. Apparent inconsistency is largely driven by accounting and economic factors, with only limited evidence that investment banking-related conflicts play a role. Moreover, inconsistent outputs are neither less accurate than consistent outputs nor do they resolve less investor uncertainty upon their release. Overall, our results suggest that researchers should be cautious in interpreting the correlation between analyst outputs as a measure of bias or quality, and in using a single analyst output as a proxy for an analyst's overall views.

Original language	English (US)
Article number	101339
Journal	Journal of Accounting and Economics
Volume	71
Issue number	1
DOIs	https://doi.org/10.1016/j.jacceco.2020.101339
State	Published - Feb 1 2021

Bibliographical note

Funding Information:
We thank Mark Bradshaw, Gus De Franco, Michael Drake, Fabrizio Ferri (Reviewer), Michael Jung, Chandra Kanodia, Mark Lang (Editor), Stephannie Larocque, Robbie Moon, Tzachi Zach, and Gaoqing Zhang as well as workshop participants at the Georgia Institute of Technology, Ohio State University, the University of Minnesota, the University of Toronto, and the Wharton School for helpful comments. We gratefully acknowledge financial support from the Fisher College of Business, the Carlson School of Management, and the KU School of Business.

Funding Information:
We thank Mark Bradshaw, Gus De Franco, Michael Drake, Fabrizio Ferri (Reviewer), Michael Jung, Chandra Kanodia, Mark Lang (Editor), Stephannie Larocque, Robbie Moon, Tzachi Zach, and Gaoqing Zhang as well as workshop participants at the Georgia Institute of Technology, Ohio State University, the University of Minnesota, the University of Toronto, and the Wharton School for helpful comments. We gratefully acknowledge financial support from the Fisher College of Business, the Carlson School of Management, and the KU School of Business.

Publisher Copyright:
© 2020 Elsevier B.V.

Copyright:
Copyright 2021 Elsevier B.V., All rights reserved.

Keywords

Analysts
Conflicts of interest
Earnings estimates
Inconsistency
Recommendations
Target prices

Publisher link

10.1016/j.jacceco.2020.101339

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title = "Seemingly inconsistent analyst revisions",

abstract = "In about 20%–30% of cases where an analyst revises two outputs (namely, earnings estimates, target prices, or stock recommendations) simultaneously, the two estimates are revised in opposite directions. Existing literature notes that these inconsistent outputs are widespread, and concludes that they are lower-quality, driven by strategic bias, and are viewed as less valid by investors. We find that these characterizations are generally inaccurate. Apparent inconsistency is largely driven by accounting and economic factors, with only limited evidence that investment banking-related conflicts play a role. Moreover, inconsistent outputs are neither less accurate than consistent outputs nor do they resolve less investor uncertainty upon their release. Overall, our results suggest that researchers should be cautious in interpreting the correlation between analyst outputs as a measure of bias or quality, and in using a single analyst output as a proxy for an analyst's overall views.",

keywords = "Analysts, Conflicts of interest, Earnings estimates, Inconsistency, Recommendations, Target prices",

author = "Michael Iselin and Min Park and {Van Buskirk}, Andrew",

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doi = "10.1016/j.jacceco.2020.101339",

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AU - Van Buskirk, Andrew

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PY - 2021/2/1

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N2 - In about 20%–30% of cases where an analyst revises two outputs (namely, earnings estimates, target prices, or stock recommendations) simultaneously, the two estimates are revised in opposite directions. Existing literature notes that these inconsistent outputs are widespread, and concludes that they are lower-quality, driven by strategic bias, and are viewed as less valid by investors. We find that these characterizations are generally inaccurate. Apparent inconsistency is largely driven by accounting and economic factors, with only limited evidence that investment banking-related conflicts play a role. Moreover, inconsistent outputs are neither less accurate than consistent outputs nor do they resolve less investor uncertainty upon their release. Overall, our results suggest that researchers should be cautious in interpreting the correlation between analyst outputs as a measure of bias or quality, and in using a single analyst output as a proxy for an analyst's overall views.

AB - In about 20%–30% of cases where an analyst revises two outputs (namely, earnings estimates, target prices, or stock recommendations) simultaneously, the two estimates are revised in opposite directions. Existing literature notes that these inconsistent outputs are widespread, and concludes that they are lower-quality, driven by strategic bias, and are viewed as less valid by investors. We find that these characterizations are generally inaccurate. Apparent inconsistency is largely driven by accounting and economic factors, with only limited evidence that investment banking-related conflicts play a role. Moreover, inconsistent outputs are neither less accurate than consistent outputs nor do they resolve less investor uncertainty upon their release. Overall, our results suggest that researchers should be cautious in interpreting the correlation between analyst outputs as a measure of bias or quality, and in using a single analyst output as a proxy for an analyst's overall views.

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KW - Inconsistency

KW - Recommendations

KW - Target prices

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Seemingly inconsistent analyst revisions

Abstract

Bibliographical note

Keywords

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