Career Concerns of Banking Analysts

by Joanne Horton, George Serafeim & Shan Wu

Overview — This paper investigates how career concerns of analysts that forecast the performance of potential future employers influence their forecasts. Findings show evidence of a walk-down to beatable earnings when forecasting earnings of future employers, but not of companies that are unlikely to be future employers. Results overall suggest that the conflict of interest faced by banking analysts will contribute to the poor information environment of financial institutions.

Author Abstract

We study how career concerns influence banking analysts' forecasts and how their forecasting behavior benefits both them and bank managers. We show that banking analysts issue early in the year relatively more optimistic and later in the year more pessimistic forecasts for banks that could be their future employers. This pattern is not observed when the same analysts forecast earnings of companies that are not likely to be their future employers. Moreover, we use the Global Settlement as an exogenous shock, which limited outside opportunities and therefore exacerbated career concerns, and show that this forecast pattern is more pronounced after the Settlement. Both analysts and bank executives benefit from this behavior. Analysts issuing more biased forecasts for potential future employers are more likely to face favorable career outcomes, and bank executives appear to profit from the analysts' bias since the bias is associated with higher levels of insider trading. Our results highlight the bias created by asking analysts to rate their outside opportunities in the labor market.