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Market Demand for Conservative Analysts
Artur Hugon, Georgia State University
Volkan Muslu, The University of Texas at Dallas
ABSTRACT. Research by sell-side analysts is viewed with skepticism due not only to incentives-based explanations of aggressive research practices but also to the presence of well-publicized industry scandals. We conjecture that this skepticism induces a natural market demand for the research of conservative analysts. To investigate, we first construct a measure of analyst conservatism based on analysts’ past earnings forecasting patterns, and then assess the market reaction to analysts’ forecast revisions conditioned on their levels of conservatism. Our results indicate a stronger market reaction to more conservative analysts’ forecast revisions. Further, this result is present in settings where an enhanced demand is expected, i.e., companies with higher levels of institutional holdings and long-horizon ownership.
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