Out of Balance: Do Analysts Issue Sell Recommendations to Manage their Recommendation Distributions?

Using the passage of Global Settlement as an exogenous shock, we show that disclosure requirements about analysts’ recommendation distributions incentivize analysts to manage their recommendation distributions to reduce concerns about perceived objectivity. Following the regulation, analysts frequently issue sell recommendations concurrently with buy recommendations, consistent with recommendation distribution management. Analysts’ propensity to provide concurrent sell recommendations increases as recommendation distributions deviate from historical benchmarks and when public scrutiny and visibility is high. Importantly, we find no evidence of such behavior prior to Global Settlement suggesting unintended consequences associated with the regulation. This behavior has important implications for investors: sell recommendations issued concurrently with buy recommendations provide a weaker investment signal, as they exhibit muted return reactions and are less likely to be supported by downward earnings forecast revisions. Overall, our results highlight the importance of analysts’ distributional incentives in influencing the quality of recommendations.