An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Zili Zhuang
University of Pennsylvania

Abstract: This paper investigates the link between analyst career incentives and anti-herding forecasting behavior. Based on theories of herding and of economic tournaments, I examine whether (1) incentives for boldness exist, and (2) analysts act on the incentives. Controlling for accuracy, I find that boldness is rewarded with favorable job separations and star rankings. I also find that boldness may be rewarded even when accuracy is sacrificed. All these indicate that there are incentives for analysts to be bold. Furthermore, analysts who are interim losers of the Institutional Investor star tournament have strong incentives to make bold moves in the final part of the tournament in an attempt to catch up, though this tournament effect is less pronounced for more experienced analysts. This suggests that analysts act on incentives for boldness. The tournament incentives can be perverse in that some analysts are tempted to issue bold forecasts not based on information.

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