Why Do Analysts Issue Recommendations On Weekends?
Monday, April 7, 2014 – ( 10:00 am to 11:00 am )
Location: BC 430
Howe School Talk
Nan HU, Assistant Professor of Accounting & Finance, University of Wisconsin- Eau Claire
ABSTRACT: Prior studies have demonstrated that financial analysts are more likely to issue favorable recommendations because managers will reward those analysts who issued upgrade recommendations with more information. The NASD Rule 2711 and amended NYSE Rule 472 in 2002 forced analysts to issue a certain percentage of sell ratings. In such a case, how did analysts cater to managers without violating the rules? Our empirical results suggest that, due to pressure from these regulations, analysts chose to hide unfavorable recommendations by issuing them on weekends. In addition, downgrade recommendations issued on weekends are associated with significantly less negative market responses compared to those issued on weekdays in short term, but revert in about 30 days. Furthermore, we find that analysts following such a practice experience an increase in their future forecast accuracy compared to analysts who issue downgrade recommendations on weekdays, indicating that managers reward those analysts who issue unfavorable recommendations on weekends with more information. These results are consistent with the hypothesis that analysts hide unfavorable recommendation revisions on weekends to curry favor with firm management in order to gain better access to management’s private information.