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The Cross-Section of Analyst Recommendations

  • Sorescu, Sorin
  • Subrahmanyam, Avanidhar

We analyze the relation between analyst attributes (years of experience, reputation of the analysts’ brokerage houses) and the short- and long-term price reactions to recommendations made by the analysts. We find that in the long-term, the recommendation changes of highly experienced analysts outperform those of low-experience ones. In addition, investors appear to overreact to dramatic upgrades of low-ability analysts, and underreact to small upgrades by high-ability analysts. These results are consistent with the Griffin and Tversky (1992) argument that agents place too much emphasis on the strength of the signal (the dramatic nature of the event) and insufficient emphasis on the weight (the ability of the analyst making the recommendation). The study helps promote an understanding of the analyst industry and its interaction with the investing population.

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Paper provided by Anderson Graduate School of Management, UCLA in its series University of California at Los Angeles, Anderson Graduate School of Management with number qt76x8k0cc.

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Date of creation: 09 Jan 2004
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Handle: RePEc:cdl:anderf:qt76x8k0cc
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Web page: http://www.escholarship.org/repec/anderson_fin/

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  1. 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.
  2. Irvine, Paul J., 2003. "The incremental impact of analyst initiation of coverage," Journal of Corporate Finance, Elsevier, vol. 9(4), pages 431-451, September.
  3. 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.
  4. 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.
  5. 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.
  6. Mark L. Mitchell & Erik Stafford, 1997. "Managerial Decisions and Long-Term Stock Price Performance," CRSP working papers 453, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  7. 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.
  8. 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.
  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. Amihud, Yakov & Mendelson, Haim, 1986. "Asset pricing and the bid-ask spread," Journal of Financial Economics, Elsevier, vol. 17(2), pages 223-249, December.
  11. 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.
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