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Security Analysts' Career Concerns and Herding of Earnings Forecasts

Harrison Hong, Jeffrey D. Kubik and Amit Solomon
The RAND Journal of Economics
Vol. 31, No. 1 (Spring, 2000), pp. 121-144
Published by: Wiley on behalf of RAND Corporation
Stable URL: http://www.jstor.org/stable/2601032
Page Count: 24
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Security Analysts' Career Concerns and Herding of Earnings Forecasts
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Abstract

Several theories of reputation and herd behavior (e.g., Scharfstein and Stein (1990), and Zwiebel (1995)) suggest that herding among agents should vary with career concerns. Our goal is to document whether such a link exists in the labor market for security analysts. We find that inexperienced analysts are more likely to be terminated for inaccurate earnings forecasts than are their more experienced counterparts. Controlling for forecast accuracy, they are also more likely to be terminated for bold forecasts that deviate from the consensus. Consistent with these implicit incentives, we find that inexperienced analysts deviate less from consensus forecasts. Additionally, inexperienced analysts are less likely to issue timely forecasts, and they revise their forecasts more frequently. These findings are broadly consistent with existing career-concern-motivated herding theories.

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