Analystsʹ Heterogeneous Earnings Forecasts and Stock Recommendations

We examine the relation between analystsʹ earnings forecasts and their stock recommendations. We hypothesize that if analysts base their recommendations on their earnings forecasts, recommendations will be more (less) favorable relative to consensus recommendations when analystsʹ earnings forecasts are more optimistic (pessimistic) relative to consensus earnings forecasts. The data support this hypothesis. We find the relation between recommendations and forecasts to be stronger when earnings are more value relevant. Factors such as lower earnings volatility, higher growth, lower market risk, healthier financial conditions, and larger analyst following make stock recommendations more responsive to earnings forecasts. Stock recommendations are also more responsive when the forecast horizon is longer.