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Does equity analyst research lack rigour and objectivity? Evidence from conference call questions and research notes

Does equity analyst research lack rigour and objectivity? Evidence from conference call questions... Doubts have been raised about the rigour and objectivity of sell-side analysts’ research due to institutional structures that promote pro-management behaviour. However, research in psychology stresses the importance of controlling for biases in individuals’ inherent cognitive processing behaviour when drawing conclusions about their propensity to undertake careful scientific analysis. Using social cognition theory, we predict that the rigour and objectivity evident in analyst research is more pronounced following unexpected news in general and unexpected bad news in particular. We evaluate this prediction against the null hypothesis that analyst research consistently lacks rigour and objectivity to maintain good relations with management. Using U.S. firm earnings surprises as our conditioning event, we examine the content of analysts’ conference call questions and research notes to assess the properties of their research. We find that analysts’ notes and conference call questions display material levels of rigour and objectivity when earnings news is unexpectedly positive, and that these characteristics are more pronounced in response to unexpectedly poor earnings news. Results are consistent with analysts’ innate cognitive processing response counteracting institutional considerations when attributional search incentives are strong. Exploratory analysis suggests that studying verbal and written outputs provides a more complete picture of analysts’ work. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Accounting and Business Research Taylor & Francis

Does equity analyst research lack rigour and objectivity? Evidence from conference call questions and research notes

Does equity analyst research lack rigour and objectivity? Evidence from conference call questions and research notes

Accounting and Business Research , Volume 48 (1): 32 – Jan 2, 2018

Abstract

Doubts have been raised about the rigour and objectivity of sell-side analysts’ research due to institutional structures that promote pro-management behaviour. However, research in psychology stresses the importance of controlling for biases in individuals’ inherent cognitive processing behaviour when drawing conclusions about their propensity to undertake careful scientific analysis. Using social cognition theory, we predict that the rigour and objectivity evident in analyst research is more pronounced following unexpected news in general and unexpected bad news in particular. We evaluate this prediction against the null hypothesis that analyst research consistently lacks rigour and objectivity to maintain good relations with management. Using U.S. firm earnings surprises as our conditioning event, we examine the content of analysts’ conference call questions and research notes to assess the properties of their research. We find that analysts’ notes and conference call questions display material levels of rigour and objectivity when earnings news is unexpectedly positive, and that these characteristics are more pronounced in response to unexpectedly poor earnings news. Results are consistent with analysts’ innate cognitive processing response counteracting institutional considerations when attributional search incentives are strong. Exploratory analysis suggests that studying verbal and written outputs provides a more complete picture of analysts’ work.

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References (109)

Publisher
Taylor & Francis
Copyright
© 2016 Informa UK Limited, trading as Taylor & Francis Group
ISSN
2159-4260
eISSN
0001-4788
DOI
10.1080/00014788.2016.1230487
Publisher site
See Article on Publisher Site

Abstract

Doubts have been raised about the rigour and objectivity of sell-side analysts’ research due to institutional structures that promote pro-management behaviour. However, research in psychology stresses the importance of controlling for biases in individuals’ inherent cognitive processing behaviour when drawing conclusions about their propensity to undertake careful scientific analysis. Using social cognition theory, we predict that the rigour and objectivity evident in analyst research is more pronounced following unexpected news in general and unexpected bad news in particular. We evaluate this prediction against the null hypothesis that analyst research consistently lacks rigour and objectivity to maintain good relations with management. Using U.S. firm earnings surprises as our conditioning event, we examine the content of analysts’ conference call questions and research notes to assess the properties of their research. We find that analysts’ notes and conference call questions display material levels of rigour and objectivity when earnings news is unexpectedly positive, and that these characteristics are more pronounced in response to unexpectedly poor earnings news. Results are consistent with analysts’ innate cognitive processing response counteracting institutional considerations when attributional search incentives are strong. Exploratory analysis suggests that studying verbal and written outputs provides a more complete picture of analysts’ work.

Journal

Accounting and Business ResearchTaylor & Francis

Published: Jan 2, 2018

Keywords: capital markets; textual analysis; analyst reports; conference calls

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