How Credible are Inconsistent Analyst Revisions? Experimental Evidence

• In Event: Impact of Managers, Analysts, and Stakeholders on Investors

Abstract

A significant portion of sell-side analysts’ recommendation revisions are directionally inconsistent with their earnings forecast revisions. That is, analysts revise earnings forecasts upward (downward) while downgrading (upgrading) their recommendation on the stock. Prior research is mixed on whether markets view inconsistent revisions as less credible relative to consistent revisions. We use an experiment to investigate whether inconsistent revisions affect retail investors’ judgements of analysts’ competence and trustworthiness. Further, we investigate whether analyst affiliation moderates this relationship. We find that the inconsistent revisions reduce investors’ perceptions of analysts’ trustworthiness for unaffiliated analysts, but not for affiliated analysts. By contrast, inconsistent revisions reduce investors’ perceptions of analysts’ competence, both for unaffiliated and affiliated analysts. Our results suggest that the impact of inconsistent revisions on analyst credibility may be more nuanced than previously understood.

Authors

• Timothy Potsaid, Bentley University

• Katarzyna K Rupar, Georgia Institute of Technology

• Shankar Venkataraman, Bentley University