March 2011
Article
Journal of Economic Behavior & Organization

Do Sell-Side Stock Analysts Exhibit Escalation of Commitment?

By: John Beshears and Katherine L. Milkman

Format:Print

Abstract

This paper presents evidence that when an analyst makes an out-of-consensus forecast of a company's quarterly earnings that turns out to be incorrect, she escalates her commitment to maintaining an out-of-consensus view on the company. Relative to an analyst who was close to the consensus, the out-of-consensus analyst adjusts her forecasts for the current fiscal year's earnings less in the direction of the quarterly earnings surprise. On average, this type of updating behavior reduces forecasting accuracy, so it does not seem to reflect superior private information. Further empirical results suggest that analysts do not have financial incentives to stand by extreme stock calls in the face of contradictory evidence. Managerial and financial market implications are discussed.

Keywords

Escalation Of Commitment; Stock Market; Updating; Behavioral Economics; Motivation and Incentives; Behavior; Consumer Behavior; Financial Markets; Forecasting and Prediction

Citation

Beshears, John, and Katherine L. Milkman. "Do Sell-Side Stock Analysts Exhibit Escalation of Commitment?" Journal of Economic Behavior & Organization 77, no. 3 (March 2011): 304–317.