Does equity analyst research lack rigour and objectivity? Evidence from conference call questions and research notes

Doubts have been raised about the rigour and objectivity of sell-side analysts’ research due to institutional structures that promote pro-management behaviour. However, research in psychology stresses the importance of controlling for biases in individuals’ inherent cognitive processing behaviour when drawing conclusions about their propensity to undertake careful scientific analysis. Using social cognition theory, we predict that the rigour and objectivity evident in analyst research is more pronounced following unexpected news in general and unexpected bad news in particular. We evaluate this prediction against the null hypothesis that analyst research consistently lacks rigour and objectivity to maintain good relations with management. Using U.S. firm earnings surprises as our conditioning event, we examine the content of analysts’ conference call questions and research notes to assess the properties of their research. We find that analysts’ notes and conference call questions display material levels of rigour and objectivity when earnings news is unexpectedly positive, and that these characteristics are more pronounced in response to unexpectedly poor earnings news. Results are consistent with analysts’ innate cognitive processing response counteracting institutional considerations when attributional search incentives are strong. Exploratory analysis suggests that studying verbal and written outputs provides a more complete picture of analysts’ work.