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Information Content of Equity Analyst Reports

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Author Info

  • Asquith, Paul
  • Mikhail, Michael
  • Au, Andrea
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    Abstract

    This paper catalogs the complete text of a large sample of All-American Analyst reports and examines the market reaction to the information released. It shows that the text of the report, which provides the justifications supporting an analyst's summary opinion, provides information beyond that contained in earnings forecasts, recommendation levels, and price targets. Including the strength of the analyst's justifications, reduces, and in some models eliminates, the significance of the information available in earnings forecasts and recommendation revisions. By controlling for the simultaneous release of other information, we show that analyst reports do not merely repeat firm releases of information, but also provide both new information and/or interpretation of previously released information to the market. By examining whether the market's reaction differs by report type (i.e. upgrade, reiteration, or downgrade), we demonstrate that information in a report is most important for downgrades and that target prices and the strength of the justifications are the only elements that matter for reiterations. Finally, we find no correlation between the valuation methodology used by analysts and either the market's reaction to a report's release or the analyst's accuracy. Our adjusted R2 of nearly 26% is three or four times larger than that of other studies using only partial content from analyst reports.

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    File URL: http://hdl.handle.net/1721.1/7345
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    Bibliographic Info

    Paper provided by Massachusetts Institute of Technology (MIT), Sloan School of Management in its series Working papers with number 4264-02.

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    Date of creation: 23 Nov 2004
    Date of revision:
    Handle: RePEc:mit:sloanp:7345

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    Postal: MASSACHUSETTS INSTITUTE OF TECHNOLOGY (MIT), SLOAN SCHOOL OF MANAGEMENT, 50 MEMORIAL DRIVE CAMBRIDGE MASSACHUSETTS 02142 USA
    Phone: 617-253-2659
    Web page: http://mitsloan.mit.edu/
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    Postal: MASSACHUSETTS INSTITUTE OF TECHNOLOGY (MIT), SLOAN SCHOOL OF MANAGEMENT, 50 MEMORIAL DRIVE CAMBRIDGE MASSACHUSETTS 02142 USA

    Related research

    Keywords: Stock recommendations; price targets; earnings forecasts; security analysts;

    This paper has been announced in the following NEP Reports:

    References

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    1. Lys, Thomas & Sohn, Sungkyu, 1990. "The association between revisions of financial analysts' earnings forecasts and security-price changes," Journal of Accounting and Economics, Elsevier, vol. 13(4), pages 341-363, December.
    2. Lloyd-Davies, Peter & Canes, Michael, 1978. "Stock Prices and the Publication of Second-Hand Information," The Journal of Business, University of Chicago Press, vol. 51(1), pages 43-56, January.
    3. Liu, Pu & Smith, Stanley D. & Syed, Azmat A., 1990. "Stock Price Reactions to The Wall Street Journal's Securities Recommendations," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 25(03), pages 399-410, September.
    4. Bjerring, James H & Lakonishok, Josef & Vermaelen, Theo, 1983. " Stock Prices and Financial Analysts' Recommendations," Journal of Finance, American Finance Association, vol. 38(1), pages 187-204, March.
    5. Elton, Edwin J & Gruber, Martin J & Grossman, Seth, 1986. " Discrete Expectational Data and Portfolio Performance," Journal of Finance, American Finance Association, vol. 41(3), pages 699-713, July.
    6. Womack, Kent L, 1996. " Do Brokerage Analysts' Recommendations Have Investment Value?," Journal of Finance, American Finance Association, vol. 51(1), pages 137-67, March.
    7. Michaely, Roni & Womack, Kent L, 1999. "Conflict of Interest and the Credibility of Underwriter Analyst Recommendations," Review of Financial Studies, Society for Financial Studies, vol. 12(4), pages 653-86.
    8. Beneish, Messod D, 1991. "Stock Prices and the Dissemination of Analysts' Recommendations," The Journal of Business, University of Chicago Press, vol. 64(3), pages 393-416, July.
    9. Stickel, Scott E, 1992. " Reputation and Performance among Security Analysts," Journal of Finance, American Finance Association, vol. 47(5), pages 1811-36, December.
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    Cited by:
    1. 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.

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