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Security analysts' incentive and cognitive processing bias: evidence from analysts' recommendations

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  • Ruei-Shian Wu
  • Hsiou-wei W. Lin

Abstract

This study examines how incentive- and behavior-based variables affect analyst recommendation revisions. We use duration analysis to test analysts' underreaction to information by isolating the effects of incentives and cognitive processing biases on the timing of recommendation revisions. By controlling for favorable (unfavorable) preceding recommendations, we find that analysts delay conveying bad (good) news, which is consistent with the predictions of both the incentives and cognitive dissonance hypotheses (only the cognitive dissonance hypothesis). We also find that analysts delay responses to favorable information for outperformers with lower representative information, suggesting that analysts' underreaction to new favorable information is partially explained by the effect of psychological conservatism. Our results are robust after taking into account analyst affiliations, NASD Rule 2711 and SEC Rule 472, and market conditions.

Suggested Citation

  • Ruei-Shian Wu & Hsiou-wei W. Lin, 2014. "Security analysts' incentive and cognitive processing bias: evidence from analysts' recommendations," Asia-Pacific Journal of Accounting & Economics, Taylor & Francis Journals, vol. 21(4), pages 443-471, December.
    • Handle: RePEc:taf:raaexx:v:21:y:2014:i:4:p:443-471
    DOI: 10.1080/16081625.2012.749776
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