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Information Misweighting and Stock Recommendations

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  • Martinez, Jose Vicente

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    (Swedish Institute for Financial Research)

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    Abstract

    I provide evidence that analysts whose earnings forecast revisions showed signs of greater exaggeration in the past make recommendation changes that lead to lower abnormal returns than their peers. Interpreting stock recommendations as a forecast of future abnormal returns, I show that this evidence is consistent with the hypothesis that analysts who typically exaggerate or overstate the weight of their private information when issuing forecasts also do so when making recommendations. I also show that past earnings forecast provide incremental information about analysts' recommending behavior beyond that contained in past recommendations.

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    Bibliographic Info

    Paper provided by Institute for Financial Research in its series SIFR Research Report Series with number 59.

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    Length: 48 pages
    Date of creation: 15 Jul 2007
    Date of revision:
    Handle: RePEc:hhs:sifrwp:0059

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    Related research

    Keywords: Information misweighting; stock recommendations; earnings forecasts; financial analysts;

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    1. Harrison Hong & Jeffrey D. Kubik & Amit Solomon, 2000. "Security Analysts' Career Concerns and Herding of Earnings Forecasts," RAND Journal of Economics, The RAND Corporation, vol. 31(1), pages 121-144, Spring.
    2. Narasimhan Jegadeesh & Joonghyuk Kim & Susan D. Krische & Charles M. C. Lee, 2004. "Analyzing the Analysts: When Do Recommendations Add Value?," Journal of Finance, American Finance Association, vol. 59(3), pages 1083-1124, 06.
    3. Li, Xi, 2005. "The persistence of relative performance in stock recommendations of sell-side financial analysts," Journal of Accounting and Economics, Elsevier, vol. 40(1-3), pages 129-152, December.
    4. Loh, Roger K. & Mian, G. Mujtaba, 2006. "Do accurate earnings forecasts facilitate superior investment recommendations?," Journal of Financial Economics, Elsevier, vol. 80(2), pages 455-483, May.
    5. Welch, Ivo, 2000. "Herding among security analysts," Journal of Financial Economics, Elsevier, vol. 58(3), pages 369-396, December.
    6. Zitzewitz, Eric, 2001. "Measuring Herding and Exaggeration by Equity Analysts and Other Opinion Sellers," Research Papers 1802, Stanford University, Graduate School of Business.
    7. Mikhail, Michael B. & Walther, Beverly R. & Willis, Richard H., 2004. "Do security analysts exhibit persistent differences in stock picking ability?," Journal of Financial Economics, Elsevier, vol. 74(1), pages 67-91, October.
    8. Womack, Kent L, 1996. " Do Brokerage Analysts' Recommendations Have Investment Value?," Journal of Finance, American Finance Association, vol. 51(1), pages 137-67, March.
    9. Alexander Ljungqvist & Christopher Malloy & Felicia Marston, 2009. "Rewriting History," Journal of Finance, American Finance Association, vol. 64(4), pages 1935-1960, 08.
    10. Carhart, Mark M, 1997. " On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
    11. Qi Chen & Wei Jiang, 2006. "Analysts' Weighting of Private and Public Information," Review of Financial Studies, Society for Financial Studies, vol. 19(1), pages 319-355.
    12. Green, T. Clifton, 2006. "The Value of Client Access to Analyst Recommendations," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 41(01), pages 1-24, March.
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