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  • 2021
  • Working Paper

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

By: Joseph Pacelli, Charles Chao Kang, Kenneth J. Merkley and Roni Michaely
  • Format:Print
  • | Language:English
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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

Investment Banking; Analysis; Operations; Stocks

Citation

Pacelli, Joseph, Charles Chao Kang, Kenneth J. Merkley, and Roni Michaely. "Out of Balance: Do Analysts Issue Sell Recommendations to Manage their Recommendation Distributions?" Working Paper, February 2021.
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About The Author

Joseph Pacelli

Accounting and Management
→More Publications

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More from the Authors
  • Do Job Seekers Value Diversity Information? Evidence from a Field Experiment By: Joseph Pacelli, Jung Ho Choi, Kristina M. Rennekamp and Sorabh Tomar
  • Dirty Money: How Banks Influence Financial Crime By: Joseph Pacelli, Janet Gao, Jan Schneemeier and Yufeng Wu
  • Does the Freedom of Information Act Foil the Securities and Exchange Commission's Intent to Keep Investigations Confidential? By: Braiden Coleman, Kenneth Merkley, Brian Miller and Joseph Pacelli
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