(The) role of investor sentiment on analyst herding behavior

Abstract

This study examines two factors affecting analyst herding behavior except analyst characteristics. As many studies investigate that analysts do not fully reflect their private information, and issue the forecast closely to others’ consensus, which is called Herding. It results in information inefficiency for investors, so it is important to understand incentives and factors that influence analysts’ decision to issue herding forecasts. Prior studies have examined that not only several analyst characteristics but also firms’ earnings uncertainty affect analyst herding behavior. Moreover, this paper suggests another factor related to analyst herding. This paper predicts that analysts are less likely to herd when investor sentiment is high. It is based on prior research explaining that analysts become more optimistic when investor sentiment is high, and optimistic forecasts result in more favorable job separations to analysts. That is, analysts might face less career concerns in case of high investor sentiment. In addition, this paper investigates whether there is an interaction effect of earnings uncertainty and investor sentiment on analyst herding. The empirical results show that both earnings uncertainty and investor sentiment are negatively associated with analyst herding. Additionally, the coefficient of an interaction term is negative, meaning that the negative relation between investor sentiment and analyst herding is weaker for high uncertainty firms. This paper contributes to the literature regarding analyst herding behavior by finding a market-wide factor influencing analyst herding in addition to analyst characteristics and firm’s earnings uncertainty.