Tournaments and the Impetuous Contestants: An Analysis of Incentives for Analyst Forecast Boldness

Abstract

This paper provides evidence that tournaments motivate analysts to behave boldly and that tournament incentives can be perverse. Controlling for forecast accuracy, analysts making bold forecasts are more likely to win the tournaments measured by moving to prestigious brokerages or being named as members of the Institutional Investor’s All-American Research Team (II All-American tournament). The paper also finds that, relative to others, analysts who are interim losers in the annual II All-American tournament tend to make bolder moves toward the end of the tournament. Furthermore, there is evidence that sometimes boldness is rewarded in tournaments even when accuracy is compromised. These suggest that tournaments could provide perverse incentives to analysts, and that analysts adapt their behavior to the incentives. The implication is that analysts’ impetuous moves, induced by tournament incentives, may not always produce forecasts based on the best use of their private information.