How Do Retail Investors Evaluate the Credibility of Directionally Inconsistent Analyst Revisions? Experimental Evidence

A significant proportion of sell-side analysts’ recommendation revisions are directionally inconsistent with their earnings forecast revisions. For example, analysts revise earnings forecasts upward (downward) while simultaneously downgrading (upgrading) the recommendation. Prior research is inconclusive on whether markets view such directionally inconsistent revisions as less credible compared to consistent revisions. We experimentally investigate whether inconsistent revisions affect retail investors’ judgements of analysts’ competence and trustworthiness—two components of credibility. In line with predictions from attribution theory, we find inconsistent revisions reduce perceptions of trustworthiness for unaffiliated analysts, but not for affiliated analysts. This consistency × affiliation interaction is stronger for upward recommendation revisions than for downward revisions. However, inconsistent revisions reduce investors’ perceptions of analysts’ competence equally for unaffiliated and affiliated analysts regardless of the direction of their recommendation. Our results suggest that retail investors’ evaluation of the credibility of inconsistent revisions may differ significantly from how markets, as a whole, assess directionally inconsistent revisions