Upgrades Vs. Downgrades: The Impact on Access to Information and Analysts' Forecast Accuracy

Abstract

This study explores recent SEC concerns and anecdotal reports that managers provide or deny analysts access to information based on the favorableness of their stock recommendations. We examine the relative forecast accuracy of analysts before and after a change in their recommendation (either upward or downward) under the assumption that increases (decreases) to management-provided information will increase (decrease) analysts' relative forecast accuracy. We find that, after controlling for the age of forecasts: 1) analysts who upgrade their recommendations experience a significant increase in their relative forecast accuracy, 2) analysts who downgrade their recommendations do not experience a significant decrease in their relative forecast accuracy, but 3) downgrading analysts improve less in forecast accuracy than upgrading analysts following their respective recommendation change. In addition, we find that the greater increase in relative accuracy for the upgrade group compared to the downgrade group exists prior to the passage of Regulation FD but not after. Finally, we find that the proportion of analyst forecasts issued independently of other analysts (i.e., on days when other analysts do not forecast) declines more following a downgrade relative to an upgrade, suggesting that analysts receive less private information/rely more on public information following a downgrade relative to an upgrade. The combined results are consistent with analysts receiving relatively less management-provided information following a downgrade relative to an upgrade.