Analysts’ Unfavorable Recommendation Initiations

Surprisingly, analysts initiate unfavorable coverage nearly as often as they initiate positive coverage. We show that analysts do this to build their reputation. First, they are more likely to initiate unfavorable recommendations when their reports include more discussions about firm uncertainty. This suggests that analysts are dissuaded from issuing favorable forecasts when they perceive the firm’s future prospects to be unclear. Second, we find that analysts gain credibility from investors after they begin coverage with unfavorable recommendations. Specifically, the market reactions to subsequent upgrade recommendations are significantly stronger when analysts initiate unfavorable coverage than benchmark returns.