Analyst rounding of EPS forecasts and stock recommendations |
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| Institution: | 1. Maine Business School, The University of Maine, 5723 Donald P. Corbett Business Building Room 313, Orono, ME 04469-5723, United States;2. Manning School of Business, The University of Massachusetts Lowell, Pulichino Tong Business Center, Lowell, MA 01854, United States;3. Department of Accounting, College of Business, The University of Texas at San Antonio, One UTSA Circle, San Antonio, TX 78249, United States;1. School of Accounting, College of Business Administration, Florida International University, USA;2. Accounting Department, College of Business, San Francisco State University, USA;3. Department of Accounting, Finance and Economics, College of Business and Public Policy, California State University, Dominguez Hills, USA;1. School of Business and Management, State University of New York, College at Brockport, United States;2. Manning School of Business, University of Massachusetts Lowell, United States;1. Binghamton University – SUNY, USA;2. The Ohio State University, USA;1. University of Alabama at Birmingham, Collat School of Business, 307B Business and Engineering Complex, Birmingham, AL 35294, United States;2. University of Alabama at Birmingham, Collat School of Business, 3011A Business and Engineering Complex, Birmingham, AL 35294, United States;3. Department of Accounting & MIS, University of Delaware, 219 Purnell Hall, Newark, DE 19716, United States |
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| Abstract: | We examine the association between analysts' stock recommendations and their tendency to round annual EPS forecasts to nickel intervals (i.e. placing a zero or five in the penny location of the forecast). We find that prior to Regulation Fair Disclosure (Reg FD), analysts were more likely to provide rounded EPS forecasts in association with unfavorable (underperform and sell) recommendations. However, after Reg FD, we find no significant association between rounded forecasts and unfavorable stock recommendations. Further, other regulations (NASD 2711, NYSE 472, and Global Research Analyst Settlement) have no impact on analyst rounding behavior. The findings in this study suggest that analyst rounding behavior is a particular form of forecasting optimism motivated, at least in part, by management relations incentives. Further, Reg FD appears partially successful at curbing the influence of management relations incentives on analysts' research. |
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