Recession Analysts and Conservative Forecasting

Abstract

This study investigates whether the properties of sell-side analysts' earnings forecasts are associated with the adverse macroeconomic conditions that exist at the time of their initial hire or major promotion. We find that analysts who begin their career in an economic recession are more conservative in their earnings forecasts: they are more pessimistic, less likely to be leaders, deviate less from the consensus, and more (less) likely to issue negative (positive) bold revisions. They are also asymmetrically more likely to respond to bad rather than good news during recessions, when bad news is abundant. Our results are not subsumed by analysts' characteristics and incentives identified in prior literature. Overall, we find that their forecast properties are associated with the adverse macroeconomic conditions at the time of initial hire or major promotion.