Standing Out from the Crowd: The Outlier’s Effect on Corporate Governance

This paper examines the real effects of outliers in the context of extreme analyst optimism and corporate governance. Using earnings forecasts issued by sell-side analysts between 1991 and 2011,  we  construct  a  proxy  to  capture  two  essential  traits  of  an  outlier’s  opinion—being markedly distinct from the others and coming from an individual instead of a cohort of agents. We show that when an analyst issues extremely optimistic forecasts that drastically deviate from peer  consensus,  there  is  a  greater  tendency  on  the  part  of  firms  to  manage  earnings.  When exploring possible  underlying  mechanisms  through  which  extreme  analyst  optimism  imposes pressure on managers to meet short-term targets, we find that the arrival of an outlier forecast gives  rise  to  the  optimism  of  peer  analysts  and  generates  stronger  reactions  from  investors. Further analyses reveal that private information and conflicts of interest cannot explain the effect of an outlier’s opinion on earnings management. Instead, an analyst’s self-motivated incentives are likely at play.

This event is an Erasmus Finance Seminar. The Erasmus Finance Seminar series brings prominent researchers in Finance from all over the world to Rotterdam.