Security analysts’ incentive and cognitive processing bias: Evidence from analysts’ recommendations
Journal
Asia-Pacific Journal of Accounting and Economics
Journal Volume
21
Journal Issue
4
Pages
443-471
Date Issued
2014
Author(s)
Wu R.-S.
Abstract
This study examines how incentive- and behavior-based variables affect analyst recommendation revisions. We use duration analysis to test analysts�� underreaction to information by isolating the effects of incentives and cognitive processing biases on the timing of recommendation revisions. By controlling for favorable (unfavorable) preceding recommendations, we find that analysts delay conveying bad (good) news, which is consistent with the predictions of both the incentives and cognitive dissonance hypotheses (only the cognitive dissonance hypothesis). We also find that analysts delay responses to favorable information for outperformers with lower representative information, suggesting that analysts�� underreaction to new favorable information is partially explained by the effect of psychological conservatism. Our results are robust after taking into account analyst affiliations, NASD Rule 2711 and SEC Rule 472, and market conditions.
Type
journal article