An investigation of how volatile financial analyst recommendations may affect managerial behaviour and financial reporting quality

Abstract

This study investigates how the volatility in analyst buy recommendations in the UK may affect managerial behaviour. It examines whether the adoption of earnings manipulation and other opportunistic behaviours, such as managing the reporting tone of press releases, financial statement complexity and CEO overconfidence, may lead to volatile buy recommendations. This study shows that the use of earnings manipulation, especially when companies' current performance differs from the forecast, is likely to result in volatile buy recommendations. Volatile buy recommendations are linked to greater financial statement complexity and higher tonal disagreement between press releases and media articles. Analysts issue less buy recommendations when financial statements are complex or when overconfident CEO behaviour is reported. Companies with volatile buy recommendations are more likely to experience greater stock price crash risk, especially when accompanied by CEO overconfidence and tonal disagreement.