Analyst Recommendations, Earnings Forecasts and Corporate Bankruptcy: Recent Evidence

Abstract

This study builds on recent research by Clarke, Ferris, Jayaraman, and Lee [2006 Clarke, J., Ferris, S. P., Jayaraman, N. and Lee, J. 2006. Are Analyst Recommendations Biased? Evidence from Corporate Bankruptcies. Journal of Financial and Quantitative Analysis, 41: 169–196. [Crossref], [Web of Science ®] , [Google Scholar]]. Based on a sample of U.S. bankruptcies between 1995 and 2001, Clarke et al. failed to find evidence of a positive bias (or overoptimism) in analyst recommendations. We extend Clarke et al.'s findings by including the Global Financial Crisis (GFC) period and using an international sample of large corporate bankruptcies (the combined total assets of our firm failure sample exceed US$1.5 trillion). We also extend their research by examining the explanatory and predictive power of earnings growth forecasts, analyst downgrades/upgrades, and analyst coverage in a firm failure model. Overall, we find significantly more evidence of analyst overoptimism than did Clarke and colleagues.

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