IDEAS home Printed from https://ideas.repec.org/a/eee/jeborg/v77y2011i3p304-317.html
   My bibliography  Save this article

Do sell-side stock analysts exhibit escalation of commitment?

Author

Listed:
  • 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.

Suggested Citation

  • Beshears, John & Milkman, Katherine L., 2011. "Do sell-side stock analysts exhibit escalation of commitment?," Journal of Economic Behavior & Organization, Elsevier, vol. 77(3), pages 304-317, March.
  • Handle: RePEc:eee:jeborg:v:77:y:2011:i:3:p:304-317
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0167-2681(10)00220-9
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Narasimhan Jegadeesh & Woojin Kim, 2010. "Do Analysts Herd? An Analysis of Recommendations and Market Reactions," Review of Financial Studies, Society for Financial Studies, pages 901-937.
    2. Djankov, Simeon & Glaeser, Edward & La Porta, Rafael & Lopez-de-Silanes, Florencio & Shleifer, Andrei, 2003. "The new comparative economics," Journal of Comparative Economics, Elsevier, vol. 31(4), pages 595-619, December.
    3. Trueman, Brett, 1994. "Analyst Forecasts and Herding Behavior," Review of Financial Studies, Society for Financial Studies, pages 97-124.
    4. Gilles Hilary & Lior Menzly, 2006. "Does Past Success Lead Analysts to Become Overconfident?," Management Science, INFORMS, pages 489-500.
    5. Harrison Hong & Jeremy C. Stein, 2007. "Disagreement and the Stock Market," Journal of Economic Perspectives, American Economic Association, pages 109-128.
    6. Tilman Ehrbeck & Robert Waldmann, 1996. "Why Are Professional Forecasters Biased? Agency versus Behavioral Explanations," The Quarterly Journal of Economics, Oxford University Press, pages 21-40.
    7. Dan Bernhardt & Murillo Campbello & Edward Kutsoati, 2002. "Who Herds?," Discussion Papers Series, Department of Economics, Tufts University 0213, Department of Economics, Tufts University.
    8. Deaves, Richard & Lüders, Erik & Schröder, Michael, 2005. "The Dynamics of Overconfidence: Evidence from Stock Market Forecasters," ZEW Discussion Papers 05-83, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    9. Deaves, Richard & Lüders, Erik & Schröder, Michael, 2010. "The dynamics of overconfidence: Evidence from stock market forecasters," Journal of Economic Behavior & Organization, Elsevier, pages 402-412.
    10. Michael B. Clement & Senyo Y. Tse, 2005. "Financial Analyst Characteristics and Herding Behavior in Forecasting," Journal of Finance, American Finance Association, vol. 60(1), pages 307-341, February.
    11. Welch, Ivo, 2000. "Herding among security analysts," Journal of Financial Economics, Elsevier, pages 369-396.
    12. Prendergast, Canice & Stole, Lars, 1996. "Impetuous Youngsters and Jaded Old-Timers: Acquiring a Reputation for Learning," Journal of Political Economy, University of Chicago Press, vol. 104(6), pages 1105-1134, December.
    13. Werner F. M. De Bondt & William P. Forbes*, 1999. "Herding in analyst earnings forecasts: evidence from the United Kingdom," European Financial Management, European Financial Management Association, vol. 5(2), pages 143-163.
    14. De Bondt, Werner F M & Thaler, Richard H, 1990. "Do Security Analysts Overreact?," American Economic Review, American Economic Association, pages 52-57.
    15. John R. Graham, 1999. "Herding among Investment Newsletters: Theory and Evidence," Journal of Finance, American Finance Association, vol. 54(1), pages 237-268, February.
    16. Cowen, Amanda & Groysberg, Boris & Healy, Paul, 2006. "Which types of analyst firms are more optimistic?," Journal of Accounting and Economics, Elsevier, pages 119-146.
    17. Judith Chevalier & Glenn Ellison, 1999. "Career Concerns of Mutual Fund Managers," The Quarterly Journal of Economics, Oxford University Press, pages 389-432.
    18. Scharfstein, David. & Stein, Jeremy C., 1988. "Herd behavior and investment," Working papers WP 2062-88., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    19. Bikhchandani, Sushil & Hirshleifer, David & Welch, Ivo, 1992. "A Theory of Fads, Fashion, Custom, and Cultural Change in Informational Cascades," Journal of Political Economy, University of Chicago Press, pages 992-1026.
    20. repec:bla:joares:v:28:y:1990:i:2:p:409-417 is not listed on IDEAS
    21. Judith Chevalier & Glenn Ellison, 1999. "Career Concerns of Mutual Fund Managers," The Quarterly Journal of Economics, Oxford University Press, pages 389-432.
    22. Qi Chen & Wei Jiang, 2006. "Analysts' Weighting of Private and Public Information," Review of Financial Studies, Society for Financial Studies, pages 319-355.
    23. repec:bla:joares:v:29:y:1991:i:1:p:170-179 is not listed on IDEAS
    24. Arkes, Hal R. & Blumer, Catherine, 1985. "The psychology of sunk cost," Organizational Behavior and Human Decision Processes, Elsevier, pages 124-140.
    25. Scharfstein, David S & Stein, Jeremy C, 1990. "Herd Behavior and Investment," American Economic Review, American Economic Association, pages 465-479.
    26. Bernhardt, Dan & Campello, Murillo & Kutsoati, Edward, 2006. "Who herds?," Journal of Financial Economics, Elsevier, pages 657-675.
    27. Abhijit V. Banerjee, 1992. "A Simple Model of Herd Behavior," The Quarterly Journal of Economics, Oxford University Press, pages 797-817.
    28. Friesen, Geoffrey & Weller, Paul A., 2006. "Quantifying cognitive biases in analyst earnings forecasts," Journal of Financial Markets, Elsevier, vol. 9(4), pages 333-365, November.
    Full references (including those not matched with items on IDEAS)

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jeborg:v:77:y:2011:i:3:p:304-317. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu). General contact details of provider: http://www.elsevier.com/locate/jebo .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.