The Consistency between Analysts’ Earnings Forecast Errors and Recommendations

We study the relationship between analysts’ earnings forecast errors and their stock recommendations. We hypothesize that analysts who give optimistic recommendations are more likely to have positive forecast errors, and analysts who give pessimistic recommendations tend to have negative forecast errors. This consistency in behaviour should be driven either by the objectivity illusion, or simply because of analysts’ rationality. Our regression results generally support the tendency of analysts’ to provide consistent estimates across these two tasks (ACAT). We also find that analyst’s consistency is independent at the analyst-firm level, meaning that ACAT is an analyst-firm characteristic.