Maureen McNichols and Patricia O'Brien, professors of accounting at Stanford University and York University in Toronto, respectively, found in a December 1996 study that analysts drag their feet when it comes to reporting negative. Inc. from a buy to a neutral rating. But at the time, it seemed like a safe move. The good news bias arises because analysts serve many masters. Often the analyst covering a stock works for a firm that funded the initial public offering or plans to assist in a secondary offering.
Analysts also have to maintain a working relationship with the companies they cover.
Criticism can strain the relationship, leaving the analyst out of the information loop. Finally, analysts have to look out for their clients, a long list that includes everyone from money managers to your aunt. That juggling act can leave some analysts sounding like a corporate mouthpiece, but the good ones maintain objectivity.