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Analyst rounding of EPS forecasts and stock recommendations

Author

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  • Akono, Henri
  • Karim, Khondkar
  • Nwaeze, Emeka

Abstract

We examine the association between analysts' stock recommendations and their tendency to round annual EPS forecasts to nickel intervals (i.e. placing a zero or five in the penny location of the forecast). We find that prior to Regulation Fair Disclosure (Reg FD), analysts were more likely to provide rounded EPS forecasts in association with unfavorable (underperform and sell) recommendations. However, after Reg FD, we find no significant association between rounded forecasts and unfavorable stock recommendations. Further, other regulations (NASD 2711, NYSE 472, and Global Research Analyst Settlement) have no impact on analyst rounding behavior. The findings in this study suggest that analyst rounding behavior is a particular form of forecasting optimism motivated, at least in part, by management relations incentives. Further, Reg FD appears partially successful at curbing the influence of management relations incentives on analysts' research.

Suggested Citation

  • Akono, Henri & Karim, Khondkar & Nwaeze, Emeka, 2019. "Analyst rounding of EPS forecasts and stock recommendations," Advances in accounting, Elsevier, vol. 44(C), pages 68-80.
    • Handle: RePEc:eee:advacc:v:44:y:2019:i:c:p:68-80
    DOI: 10.1016/j.adiac.2018.10.002
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    More about this item

    Keywords

    Rounding of EPS forecasts; Stock recommendations; Management relations incentives; Regulation Fair Disclosure; Analyst experience;
    All these keywords.

    JEL classification:

    • M49 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Other
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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