Do ties still bind? Analyst behaviour after financial restatements

Abstract We find that, compared to non‐connected analysts, analysts with professional connections to a coverage firm (i.e., connected analysts) are more likely to continue covering the firm after it issues a restatement. Furthermore, connected analysts are more likely to issue pessimistic earnings forecasts and to downgrade stock recommendations for the firm after its financial restatement. Our results also reveal the costs and benefits associated with connected analysts' pessimism – a reduced market reaction to the analysts' pessimistic research on the restating firm, and a positive effect on the market's perception of the quality of the analysts' research on non‐restating firms.