Analyst Quality, Optimistic Bias, and Reactions to Major News

This article investigates whether financial analysts ’ characteristics are associated with their asymmetric response of stock recommendations between positive and negative information shocks. The authors hypothesize that incentives exist such that quality attributes that differ-entiate analysts are positively associated with the timely revelation of negative news about a firm. As a result, the authors expect the asymmetric response to be reduced for superior analysts. Using the stock return/recommendation changes relationship, they find that the asymmetric reaction is less for analysts with characteristics that are indicative of higher quality. Furthermore, the reduction is more pronounced for analysts in the top decile and is only present when analysts have negative private information. This article therefore con-tributes to the research on differing analyst characteristics and report quality, and provides additional insights on analyst bias