Treasury Management: Those Stubborn Extremist Analysts

August 29, 2011

Study shows that equity analysts with out-of-consensus views often don’t change tack after being proven wrong. 

Tues Treas Man Dollar Jigsaw SmallNo amount of evidence will convince some analysts. Treasurers can spend countless hours on the phone or during conference calls patiently walking doomsayers through company financials. But those analysts with the most extreme views will dig in their heels nonetheless, even after the 10Q proves them way off base.

That’s the conclusion of a study by John Bashears and colleagues of the Stanford Graduate School of Business (“Do Sell-Side Stock Analysts Exhibit Escalation of Commitment?” Journal of Economic Behavior and Organization, March 2011). There is a tendency for analysts to become “wedded to their calls” – a tendency that can be exacerbated by being proven wrong, the study shows.

In fact, as the analysts Bashear and his colleagues studied got more and more extreme, or “out-of-consensus,” they became less and less responsive to the new earnings information when revising their full-year forecasts.

As might be expected, this stubbornness hurt forecasting accuracy. Revised full-year forecasts from extreme incorrect analysts were further off the mark from actual earnings than they would have been had the analysts’ updating behavior been like the behavior of analysts who started at the consensus point.

Analysts keep this up, not just in spite of long explanatory calls with treasury officials and investor relations teams, but in spite of it hurting their “batting average.” List keepers like Institutional Investor are unlikely to acknowledge an analyst who is often significantly wrong.

So what’s to be done about these individuals? Eventually their track records will erode their standing in investors’ eyes. Until then, treasury has little choice but to grin and bear it.

Leave a Reply

Your email address will not be published. Required fields are marked *