Less is more when analysts report bad news

Abstract

This study documents the existence of a positive-negative asymmetry in analysts’ consensus earnings forecast revisions. We find that upward revisions are more informative than downward revisions. After controlling for momentum, extreme downward revisions contain little incremental information compared with moderate downward revisions. The differential richness of information set in good and bad news revisions is more pronounced among bigger, more heavily covered stocks and stocks with higher institutional holding, i.e. stocks typically are more prone to the analyst agency problem. These findings are consistent with the claim that analysts systematically struggle with bad news reporting as conflicts are exacerbated with bad news but are attenuated with good news.