Analyst Spin

• In Event: Financial Analysts: Information Provision and Interpretation

Abstract

We examine a phenomenon in which sell-side equity analysts interpret earnings news in a direction that appears to contradict conventional wisdom. We conjecture that an analyst “spins” a firm’s earnings news to persuade investors in favor of the analyst’s view about the firm and its stock, and that this activity has implications for the analyst’s career. Using a large sample of analyst reports, we find that 11% of reports convey spin, where analysts place a positive spin on earnings shortfalls more often than a negative spin on earnings beats by a ratio of roughly three to one. We provide evidence that analyst spin relates to incentives for career advancement, as analysts who spin appear to stand out from the crowd in their estimates, tend to have greater credibility, but work for less prestigious brokerage houses. Indeed, analysts who spin are more likely to move up to a top-tier brokerage house in the following year and less likely to exit the profession. Corroborating these career advancement results, analysts who spin appear to be correct in both short- and long-term stock predictions. Our evidence suggests that analyst spin reflects credible interpretations of firm news.

Authors

• Michael J Jung, New York University - Stern School of Bus

• Jing Chen, SUNY - Buffalo

• Zahn Bozanic, The Ohio State University

• Xuan Huang, California State University at Long Beach