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Analysts and sentiment: A causality study

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  • Kaplanski, Guy
  • Levy, Haim

Abstract

We analyze the role that financial analysts play in the sentiment effect on stock prices. Causality analysis reveals that sentiment affects various aspects of analysts’ forecasts and recommendations. We show that experienced analysts are aware of sentiment, consciously incorporate it and have some control over its effect. As a result, the sentiment effect on analysts replicates the sentiment effect expected in stock prices and actual forecast errors are limited to certain cases. Analysts expedite the propagation of sentiment to stock prices and probably enhance the effect by influencing sophisticated investors, but they do not initiate or shape it. The new regulations, “Research Analysts and Research Reports” and “Communications with the Public”, imposed in 2002, have reduced over-optimism due to sentiment.

Suggested Citation

  • Kaplanski, Guy & Levy, Haim, 2017. "Analysts and sentiment: A causality study," The Quarterly Review of Economics and Finance, Elsevier, vol. 63(C), pages 315-327.
    • Handle: RePEc:eee:quaeco:v:63:y:2017:i:c:p:315-327
    DOI: 10.1016/j.qref.2016.06.002
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    2. Prince T. Medina, 2018. "Equity Analysis in Buying Company Shares on the Philippine Stock Exchange," GATR Journals jfbr148, Global Academy of Training and Research (GATR) Enterprise.
    3. Markus Buxbaum & Wolfgang Schultze & Samuel L. Tiras, 2023. "Do analysts’ target prices stabilize the stock market?," Review of Quantitative Finance and Accounting, Springer, vol. 61(3), pages 763-816, October.
    4. Edward J. Riedl & Estelle Y. Sun & Guannan Wang, 2021. "Sentiment, Loss Firms, and Investor Expectations of Future Earnings," Contemporary Accounting Research, John Wiley & Sons, vol. 38(1), pages 518-544, March.
    5. John Garcia, 2021. "Analyst herding and firm-level investor sentiment," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 35(4), pages 461-494, December.
    6. Chiang, Ming-Ti & Lin, Mei-Chen, 2019. "Market sentiment and herding in analysts’ stock recommendations," The North American Journal of Economics and Finance, Elsevier, vol. 48(C), pages 48-64.
    7. Park, Sung Jun & Park, Ki Young, 2019. "Can investors profit from security analyst recommendations?: New evidence on the value of consensus recommendations," Finance Research Letters, Elsevier, vol. 30(C), pages 403-413.

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    More about this item

    Keywords

    Financial analysts; Investor sentiment; Market efficiency; Behavioral finance;
    All these keywords.

    JEL classification:

    • A12 - General Economics and Teaching - - General Economics - - - Relation of Economics to Other Disciplines
    • A14 - General Economics and Teaching - - General Economics - - - Sociology of Economics
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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