Introduction

This paper aims to investigate the relationship between an analyst and a management and to see if there is a correlation between each of their actions. For example, managers tend to disclose and attribute outside negative factors as a way to explain a low profit period. If analysts believe in the explanation and deems it as plausible and truthful, they predict higher future earnings and stock valuations than if the managers had not provided an explanation. Similarly, if analysts found the disclosure to be implausible and discredited, they would forecast lower earnings and valuations for the company.

Although analysts have been offering predictions on company futures for several decades, there’s been a recent increase in the legitimacy. Financial statements and earnings announcements are public and easily located on the sec.gov/ website, but it seems that users would rather trust an analyst with experience than the financial statements themselves. With the increase in popularity - most likely due to the ease of accessibility - shareholders and potential investors have also grown more dependent and reliant on the analysts and their analysis.

Conflict of Interests

With the majority of financial analysts working in banks, pension funds, and other businesses, they are able to have a thorough understanding of what the 10-K can disclose. Many times, their analysis of a company are so accredited and deemed “trustworthy” that it is published in major news outlets such as The New York Times, CNN, and Yahoo. The SEC recognizes the potential conflict that can arise from the influence of analysts and have received prior complaints about the validity and ethicality of some recommendations. Therefore, they set up a list of recommendations on their website on “Analyzing Analyst Recommendations.”

While analysts provide an important source of