Do analysts warn investors about future earnings decreases? Evidence from their forecast revisions and changes in recommendations before a break in a string of consecutive earnings increases

This study investigates the behavior of sell-side analysts covering firms that are about to experience breaks in strings of consecutive quarterly earnings increases. I offer evidence that analysts downgrade their recommendations and break quarter earnings estimates right before announcement of the break. Analysts' forecast revisions are typically negative and recommendation downgrades are more likely to continue for at least three quarters following the break. Analysts are reluctant to lower their expectations for firms with longer strings, especially as the duration of the current string increases. Overall, my results suggest that sell-side analysts communicate information about anticipated breaks, but are not as timely as other informed investors. Further, they are more likely to downgrade when the earnings declines are large and when the declines pertain to growth firms. Analysts' prior position and relative optimism (compared to peer analysts) are the most important determinants of their new recommendations or estimates. Management communications through conference calls decrease analysts' propensity to downgrade before the break, which suggests that management is engaged in "damage control". The introduction of Regulation Fair Disclosure (RegFD), and later Regulation Analyst Certification (RegAC), reduced the possible conflict of interest, increasing the likelihood of analysts issuing downgrades.