AAA Spark Meeting of the Regions

How Do Retail Investors Evaluate the Credibility of Directionally Inconsistent Analyst Revisions? Experimental Evidence

• In Event: DSFI/SE - Session 4 (Experimental)

Abstract

A significant proportion of sell-side analysts’ recommendation revisions are directionally inconsistent
with their earnings forecast revisions. For example, analysts revise earnings forecasts upward
(downward) while simultaneously downgrading (upgrading) the recommendation. Prior research is
inconclusive on whether markets view such directionally inconsistent revisions as less credible
compared to consistent revisions. We experimentally investigate whether inconsistent revisions affect
retail investors’ judgements of analysts’ competence and trustworthiness—two components of
credibility. In line with predictions from attribution theory, we find inconsistent revisions reduce
perceptions of trustworthiness for unaffiliated analysts, but not for affiliated analysts. This
consistency × affiliation interaction is stronger for upward recommendation revisions than for
downward revisions. However, inconsistent revisions reduce investors’ perceptions of analysts’
competence equally for unaffiliated and affiliated analysts regardless of the direction of their
recommendation. Our results suggest that retail investors’ evaluation of the credibility of inconsistent
revisions may differ significantly from how markets, as a whole, assess directionally inconsistent
revisions.

Authors

• Suzanne Mullinnix, AAMVA

• Timothy Potsaid, Bentley University

• Katarzyna K. Rupar, Georgia Institute of Technology

• Shankar Venkataraman, Bentley University