Contents

Are Analyst Recommendations Biased? Evidence from Corporate Bankruptcies

Jonathan Clarke / Stephen P. Ferris / Narayanan Jayaraman / Lee, Jinsoo

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.

Issue Date
2006-03
Publisher
School of Business Administration, University of Washington
DOI
10.1017/S0022109000002465
Journal Title
Journal of Financial and Quantitative Analysis
Start Page
169
End Page
196
ISSN
0022-1090
Language
English
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