ANALYSTS’ FORECAST REPUTATIONS AND STOCK MARKET REACTIONS

Xiaolou Yang
Huaiyu (Peter) Chen
Youngstown State University
ABSTRACT
This study investigates the influences of analysts’ forecast reputations on their forecast
accuracy and stock-return reactions. The author construct a measure of forecasting reputations
based on prior forecast accuracy. Empirical results show that financial analysts who have built
their reputations will self-sustain, and their forecast errors are, on average, smaller than they
would be otherwise. Moreover, investors are more responsive to the earnings forecasts made by
the analysts with a good reputation, irrespective of whether the forecast contains good or bad
news. These findings suggest that a market force, benefited by having a good reputation, could
reduce analysts’ incentive to offer biased forecasts. Regulations on the credibility of analysts’
forecasts can improve market efficiency.