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Do sell-side stock analysts exhibit escalation of commitment?

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  • Beshears, John
  • Milkman, Katherine L.

Abstract

This paper presents evidence that when an analyst makes an out-of-consensus forecast of a company's quarterly earnings that turns out to be incorrect, she escalates her commitment to maintaining an out-of-consensus view on the company. Relative to an analyst who was close to the consensus, the out-of-consensus analyst adjusts her forecasts for the current fiscal year's earnings less in the direction of the quarterly earnings surprise. On average, this type of updating behavior reduces forecasting accuracy, so it does not seem to reflect superior private information. Further empirical results suggest that analysts do not have financial incentives to stand by extreme stock calls in the face of contradictory evidence. Managerial and financial market implications are discussed.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Behavior & Organization.

Volume (Year): 77 (2011)
Issue (Month): 3 (March)
Pages: 304-317

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Handle: RePEc:eee:jeborg:v:77:y:2011:i:3:p:304-317

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Web page: http://www.elsevier.com/locate/jebo

Related research

Keywords: Escalation of commitment Stock market Updating Behavioral economics;

References

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