How do analysts deal with hard-to-value firms? Evidence of herding

This paper examines the effects on analyst herding when firms are difficult to value. We predict that herding behaviour by financial analysts will be more likely to appear in association with firms and/or times requiring more subjective valuation, making the task of the analyst more complicated. This hypothesis is supported by the observation of a stronger tendency for analysts to herd in the presence of uncertainty versus certainty regarding the firm's valuation. Herding behaviour is particularly evident at times when analysts' earnings forecasts may convey unfavourable or pessimistic news about the firm. Such behaviour does not manifest itself in an overall analysis.