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Are Analyst Recommendations Biased? Evidence from Corporate Bankruptcies

Published online by Cambridge University Press:  06 April 2009

Jonathan Clarke ,
Stephen P. Ferris ,
Narayanan Jayaraman  and
Jinsoo Lee
Jonathan Clarke
Affiliation:
[email protected], Georgia Institute of Technology, College of Management, 800 W. Peachtree St. NW, Atlanta, GA 30332
Stephen P. Ferris
Affiliation:
[email protected], University of Missouri-Columbia, College of Business and Public Administration, 404F Cornell Hall, Columbia, MO 65211.
Narayanan Jayaraman
Affiliation:
[email protected], Georgia Institute of Technology, College of Management, 800 W. Peachtree St. NW, Atlanta, GA 30332
Jinsoo Lee
Affiliation:
[email protected], Georgia Institute of Technology, College of Management, 800 W. Peachtree St. NW, Atlanta, GA 30332
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Abstract

We test whether a bias exists in analyst recommendations for firms that file for bankruptcy during 1995–2001. We fail to find overoptimism in analyst recommendations, including those of affiliated analysts. Our multivariate analysis of the market reaction to changes in analyst recommendations indicates that prior affiliation exerts no impact on either returns or trading volume. We find that the market does not view recommendation upgrades by affiliated analysts as biased since there is no price reversal following these recommendation changes. Overall, our results suggest that recently passed legislation to reduce analysts' conflicts of interest might be an overreaction.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 41 , Issue 1 , March 2006 , pp. 169 - 196
Copyright
Copyright © School of Business Administration, University of Washington 2006

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