Spillover Effects of Loss in Analyst Reputation: Evidence from Bullish Recommendations for Misstatement Firms

This paper examines whether a loss in analyst reputation stemming from a mistake in a single research output for a single firm can influence investors' perception of the analyst's other research outputs for other firms in his portfolio. We study analysts who issued bullish recommendations (i.e. buy or strong buy) for firms engaged in financial misstatements. The subsequent revelation of the misstatement represents a negative shock to the bullish analyst's reputation. We hypothesize and find that the reputation damage weakens the market reaction to forecast revisions by the same analyst for non-misstatement firms in his portfolio. We further find that the decline in market reaction to forecast revisions by bullish analysts is greater when investors rely more on the analysts' research outputs in valuing a firm's stock, and are thus, more responsive to events that would cast doubts on analyst reputation. Overall, our results suggest that a loss in analyst reputation from a single research output can spill over to other research outputs for other firms generated by the analyst.