The Peculiar Optimism Of Analysts’ Recommendations In Year End

It was alleged that the earnings forecasts made by financial analysts experience a "walk-down" throughout a calendar year. Interested in this finding, I use the figures of Shanghai and Shenzhen A shares in China, to research into the annual pattern of analysts’stock recommendation. Unlike the "walk-down" pattern of earnings estimations, the recommendations show sort of a "walk-up" pattern in a year, or at least they do not walk down in accordance with the earnings forecast. In search for a reason to this abnormal phenomenon, a range of sources of analysts’ conflicts of interest are examined, after which I identify two possible sources of conflicts that could cause the recommendations to go up peculiarly at the end of year, namely the stock holdings by either affiliated mutual fund companies or the asset management department of the analyst’s employee.By introducing product items in the regression models, I test whether the abnormal going up of recommendations made by analysts is due to those two identified sources. As a result, increased optimism in stock recommendations is found for stock holdings by affiliated mutual fund companies or the asset management department of the analyst’s employee; peculiarly, the higher the percentage or the market value of stock holdings by the asset management department, the more optimistic analysts’ recommendations are. Yet the paper fails to conclude that fund company or asset management department affiliations are the reasons for the abnormal going up of stock recommendations at the end of year.