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The Cross Section of Analyst Recommendations

  • Sorescu, Sorin
  • Subrahmanyam, Avanidhar

We analyze the price reaction to analysts' revisions by testing the Griffin and Tversky (1992) hypothesis that agents place emphasis on the strength of the signal (the dramatic nature of the event) and may de-emphasize the weight (the ability of the analyst making the recommendation). Two attributes, namely, years of experience and the reputation of the analysts' brokerage houses form proxies for analyst ability (or weight) that we validate by documenting that revisions by high ability analysts outperform those by low ability ones. We find evidence of return persistence following small (low strength) revisions by high ability analysts and the opposite return pattern following large (high strength) revisions of low ability analysts, consistent with the arguments of Griffin and Tversky (1992). Our study provides an empirical link between evidence on individual decision making and stock market returns, and also helps promote an understanding of the analyst industry as well as its interaction with the investing population.

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Article provided by Cambridge University Press in its journal Journal of Financial and Quantitative Analysis.

Volume (Year): 41 (2006)
Issue (Month): 01 (March)
Pages: 139-168

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Handle: RePEc:cup:jfinqa:v:41:y:2006:i:01:p:139-168_00
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  1. Amihud, Yakov & Mendelson, Haim, 1986. "Asset pricing and the bid-ask spread," Journal of Financial Economics, Elsevier, vol. 17(2), pages 223-249, December.
  2. 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.
  3. Irvine, Paul J., 2003. "The incremental impact of analyst initiation of coverage," Journal of Corporate Finance, Elsevier, vol. 9(4), pages 431-451, September.
  4. Kent Daniel & Sheridan Titman, 1996. "Evidence on the Characteristics of Cross Sectional Variation in Stock Returns," NBER Working Papers 5604, National Bureau of Economic Research, Inc.
  5. Mitchell, Mark L & Stafford, Erik, 2000. "Managerial Decisions and Long-Term Stock Price Performance," The Journal of Business, University of Chicago Press, vol. 73(3), pages 287-329, July.
  6. Brown, Stephen J. & Warner, Jerold B., 1985. "Using daily stock returns : The case of event studies," Journal of Financial Economics, Elsevier, vol. 14(1), pages 3-31, March.
  7. Rodney D. Boehme & Sorin M. Sorescu, 2002. "The Long-run Performance Following Dividend Initiations and Resumptions: Underreaction or Product of Chance?," Journal of Finance, American Finance Association, vol. 57(2), pages 871-900, 04.
  8. Dimson, Elroy & Marsh, Paul R, 1984. " An Analysis of Brokers' and Analysts' Unpublished Forecasts of UK Stock Returns," Journal of Finance, American Finance Association, vol. 39(5), pages 1257-92, December.
  9. Harrison Hong & Jeffrey D. Kubik, 2003. "Analyzing the Analysts: Career Concerns and Biased Earnings Forecasts," Journal of Finance, American Finance Association, vol. 58(1), pages 313-351, 02.
  10. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
  11. Brennan, Michael J. & Subrahmanyam, Avanidhar, 1995. "Investment analysis and price formation in securities markets," Journal of Financial Economics, Elsevier, vol. 38(3), pages 361-381, July.
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