Sundaresh Ramnath * McDonough School of Business Georgetown University Ramnath@msb.edu Steve Rock * Leeds School of Business The University of Colorado at Boulder Steven.Rock@Colorado.edu Philip Shane * Leeds School of Business The University of Colorado at Boulder Phil.Shane@Colorado.edu
June 15, 2005
* We greatly appreciate the research assistance of Kevin Hee and comments and suggestions from Zhaoyang Gu and Rick Johnston. Sundaresh Ramnath is assistant professor of accounting at the McDonough School of Business, Georgetown University, G-04 Old North, Washington, DC 20057, USA; fax: +1-202-687-4031; Tel.: +1-202-687-3812. Steve Rock is assistant professor and Philip Shane is associate professor of accounting at the Leeds School of Business, The University of Colorado at Boulder, 419 UCB, Boulder, CO 80309, USA; fax: +1-303-4925962; Tel.: +1-303-735-5009 (Rock), +1-303-492-0423 (Shane).
A Review of Research Related to Financial Analysts’ Forecasts and Stock Recommendations Abstract: This paper reviews research regarding the role of financial analysts in capital markets. The paper builds on the perspectives provided by Schipper (1991) and Brown (1993). We categorize papers published mainly since 1992 and selectively discuss aspects of these papers that address or suggest key research topics of ongoing interest in seven broad areas: analysts’ decision processes, the determinants of analyst expertise and distributions of individual analysts’ forecasts, the informativeness of analysts’ research outputs, analyst and market efficiency with respect to information, effects of analysts’ economic incentives on their research outputs, effects of the institutional and regulatory environment (including cross-country comparisons), and the limitations of databases and various research paradigms.
A Review of Research Related to Financial Analysts’ Forecasts and Stock Recommendations 1. Introduction This paper reviews research related to the role of financial analysts in the allocation of resources in capital markets. Two important papers published in the early 1990s provide perspectives on the literature in this area, one appearing in Accounting Horizons (Schipper, 1991) and the other appearing in the International Journal of Forecasting (Brown, 1993). Our paper begins by summarizing the perspectives and directions for future research suggested in Schipper (1991) and Brown (1993).1 We then take a look at the highlights of what we have learned and new questions that have emerged since 1992. Our goal is to provide an organized look at the literature, with particular attention to important questions that remain open for further research. Larry Brown did not restrict his review of earnings forecasting research to the role of financial analysts. We focus more narrowly on research related to analysts’ decision processes and the usefulness of their forecasts and stock recommendations. Kothari (2001) provides an excellent overall review of capital markets research, and we refer the reader to that paper for a broader perspective. Since 1992 no less than 250 papers related to financial analysts have appeared in the nine major research journals that we used to launch our review of the literature. We also note that during the six months ending March 15, 2005 alone 105 new working papers with the word “analysts” in the abstract have posted to the Social Sciences Research Network, so the task for the next authors of a review article in this area will be even more daunting. In our review of papers published during the past 12 years, we find much progress in 1
Also see Givoly and Lakonishok (1983) for a review of analysts’ forecasting research prior to 1983.
some of the areas identified by Schipper (1991) and Brown (1993) and less progress in other areas. In particular, the research has evolved from descriptions of the statistical...