Document Type

Article

Publication Date

7-2016

Publication Source

Journal of Business Ethics

Abstract

This paper investigates the integrity of financial analysts by examining their recommendation responses to large quarterly earnings surprises. Although there is no significant difference in recommendation changes between affiliated and unaffiliated analysts in response to positive earnings surprises, affiliated analysts are more reluctant than unaffiliated analysts to downgrade stock recommendations in response to negative earnings surprises. The evidence implies that conflicts of interest undermine the integrity of financial analysts. We further examine the effects of reputation concern and the Global Research Analyst Settlement as informal and formal mechanisms, on restoring analysts’ integrity. The results show that the positive bias in recommendations remains prevalent for affiliated analysts from reputable investment banks and for the postreform period. Finally, evidence from market reactions suggests that investors fail to notice that analysts’ integrity is compromised by conflicts of interest and are misled by affiliated analysts.

Inclusive pages

1-23

ISBN/ISSN

0167-4544

Document Version

Postprint

Comments

The document provided for download is the author's accepted manuscript, which is in compliance with the publisher's policy on self-archiving. There may be differences between the published version and this document. To view the published version, visit the publisher's website.

Permission documentation is on file.

Publisher

Springer

Peer Reviewed

yes

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