This paper examines analysts’ reaction to media reporting corporate misconducts. We find that media attention on corporate misconducts is associated with higher analyst coverage, while contributing as well positively and significantly to the earning forecast bias. Our empirical findings are consistent with the “rational over optimism” hypothesis and with the implications of the Grossman-Stiglitz paradox. The results are robust to the use of different considered measures of forecast error, analyst over optimism, and instrumental variable approaches.
analysts’ forecasts, market efficiency, corporate misconducts