Out of Balance: Do Analysts Issue Sell Recommendations to Manage their Recommendation Distributions?

52 Pages Posted: 6 Aug 2020 Last revised: 24 Feb 2021

See all articles by Charles Chao Kang

Charles Chao Kang

Cornell University - Department of Accounting

Kenneth J. Merkley

Indiana University - Kelley School of Business - Department of Accounting

Roni Michaely

The University of Hong Kong; ECGI

Joseph Pacelli

Indiana University - Kelley School of Business - Department of Accounting

Date Written: February 1, 2021

Abstract

The lack of objectivity and positive bias in sell-side equity recommendations is an ongoing concern for security regulators and investors. We examine whether analysts attempt to alleviate this concern by maintaining a more balanced distribution of investment recommendations across the stocks they cover. We find that when analysts issue buy recommendations, they are more likely to concurrently issue sell recommendations in the same short-term window to offset the distributional change from issuing a buy recommendation and reduce concerns about perceived objectivity. This practice is more pronounced when analysts’ recommendation distributions deviate from historical benchmarks and when analysts face greater public scrutiny. Consistent with such recommendations being driven by distributional incentives rather than information content, we find that sell recommendations issued concurrently with buy recommendations provide weaker investment signals: they exhibit weaker return reactions and are less likely to be supported by downward earnings forecast revisions. Overall, our results provide evidence on how analysts’ portfolio incentives can influence their recommendation behavior.

Keywords: Sell-side analysts, bias, stock recommendations

Suggested Citation

Kang, Charles and Merkley, Kenneth J. and Michaely, Roni and Pacelli, Joseph, Out of Balance: Do Analysts Issue Sell Recommendations to Manage their Recommendation Distributions? (February 1, 2021). Swiss Finance Institute Research Paper No. 20-61, Available at SSRN: https://ssrn.com/abstract=3592422 or http://dx.doi.org/10.2139/ssrn.3592422

Charles Kang

Cornell University - Department of Accounting ( email )

Ithaca, NY 14853
United States

Kenneth J. Merkley

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States

Roni Michaely

The University of Hong Kong ( email )

Pokfulam Road
Hong Kong, Pokfulam HK
China

ECGI ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Joseph Pacelli (Contact Author)

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States

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