IDEAS home Printed from https://ideas.repec.org/p/ecl/ohidic/2009-7.html
   My bibliography  Save this paper

When Are Analyst Recommendation Changes Influential?

Author

Listed:
  • Loh, Roger K.

    (Singapore Management University)

  • Stulz, Rene M.

    (Ohio State University and ECGI)

Abstract

Not all stock recommendation changes are equal. In a sample constructed to minimize the impact of confounding news, relatively few analyst recommendation changes are influential in the sense that they impact investors’ beliefs about a firm in a way that could be noticed in that firm’s stock returns. More than one-third of the stock-price reactions to analyst recommendation changes have the wrong sign and only approximately 10% have significant stock-price reactions at the 5% level using an extended market model. We find that the probability of an influential recommendation is higher for leader analysts, star analysts, away-from-consensus revisions, revisions issued contemporaneously with earnings forecasts, analysts with greater relative experience, and those with more accurate earnings estimates. Growth firms, small firms, high institutional ownership firms, and high prior turnover firms are also more likely to have influential stock recommendations. Strikingly, analyst recommendations are more likely to be influential after Reg FD and the settlement. Finally, influential recommendations are associated with increases in stock volatility and large absolute changes in consensus earnings forecasts.

Suggested Citation

  • Loh, Roger K. & Stulz, Rene M., 2009. "When Are Analyst Recommendation Changes Influential?," Working Paper Series 2009-7, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
  • Handle: RePEc:ecl:ohidic:2009-7
    as

    Download full text from publisher

    File URL: http://www.cob.ohio-state.edu/fin/dice/papers/2009/2009-7.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Cooper, Rick A. & Day, Theodore E. & Lewis, Craig M., 2001. "Following the leader: *1: a study of individual analysts' earnings forecasts," Journal of Financial Economics, Elsevier, vol. 61(3), pages 383-416, September.
    2. Karl B. Diether & Christopher J. Malloy & Anna Scherbina, 2002. "Differences of Opinion and the Cross Section of Stock Returns," Journal of Finance, American Finance Association, vol. 57(5), pages 2113-2141, October.
    3. Daniel J. Bradley & Bradford D. Jordan & Jay R. Ritter, 2008. "Analyst Behavior Following IPOs: The 'Bubble Period' Evidence," Review of Financial Studies, Society for Financial Studies, vol. 21(1), pages 101-133, January.
    4. Malmendier, Ulrike M. & Shanthikumar, Devin, 2004. "Are Investors Naive about Incentives?," Research Papers 1867, Stanford University, Graduate School of Business.
    5. Harrison Hong & Jeremy C. Stein & Jialin Yu, 2007. "Simple Forecasts and Paradigm Shifts," Journal of Finance, American Finance Association, vol. 62(3), pages 1207-1242, June.
    6. Boni, Leslie & Womack, Kent L., 2006. "Analysts, Industries, and Price Momentum," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 41(01), pages 85-109, March.
    7. Ohad Kadan & Leonardo Madureira & Rong Wang & Tzachi Zach, 2009. "Conflicts of Interest and Stock Recommendations: The Effects of the Global Settlement and Related Regulations," Review of Financial Studies, Society for Financial Studies, vol. 22(10), pages 4189-4217, October.
    8. Barber, Brad M. & Lehavy, Reuven & McNichols, Maureen & Trueman, Brett, 2006. "Buys, holds, and sells: The distribution of investment banks' stock ratings and the implications for the profitability of analysts' recommendations," Journal of Accounting and Economics, Elsevier, vol. 41(1-2), pages 87-117, April.
    9. AltInkIlIç, Oya & Hansen, Robert S., 2009. "On the information role of stock recommendation revisions," Journal of Accounting and Economics, Elsevier, vol. 48(1), pages 17-36, October.
    10. Frankel, Richard & Kothari, S.P. & Weber, Joseph, 2006. "Determinants of the informativeness of analyst research," Journal of Accounting and Economics, Elsevier, vol. 41(1-2), pages 29-54, April.
    11. Alexander Ljungqvist & Christopher Malloy & Felicia Marston, 2009. "Rewriting History," Journal of Finance, American Finance Association, vol. 64(4), pages 1935-1960, August.
    12. Stefano Dellavigna & Joshua M. Pollet, 2009. "Investor Inattention and Friday Earnings Announcements," Journal of Finance, American Finance Association, vol. 64(2), pages 709-749, April.
    13. Knez, Peter J & Ready, Mark J, 1997. " On the Robustness of Size and Book-to-Market in Cross-Sectional Regressions," Journal of Finance, American Finance Association, vol. 52(4), pages 1355-1382, September.
    14. Gintschel, Andreas & Markov, Stanimir, 2004. "The effectiveness of Regulation FD," Journal of Accounting and Economics, Elsevier, vol. 37(3), pages 293-314, September.
    15. Asquith, Paul & Mikhail, Michael B. & Au, Andrea S., 2005. "Information content of equity analyst reports," Journal of Financial Economics, Elsevier, vol. 75(2), pages 245-282, February.
    16. repec:bla:joares:v:35:y:1997:i::p:131-157 is not listed on IDEAS
    17. Ivkovic, Zoran & Jegadeesh, Narasimhan, 2004. "The timing and value of forecast and recommendation revisions," Journal of Financial Economics, Elsevier, vol. 73(3), pages 433-463, September.
    18. Eugene F. Fama & Kenneth R. French, 2006. "The Value Premium and the CAPM," Journal of Finance, American Finance Association, vol. 61(5), pages 2163-2185, October.
    19. 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.
    Full references (including those not matched with items on IDEAS)

    More about this item

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ecl:ohidic:2009-7. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (). General contact details of provider: http://edirc.repec.org/data/cdohsus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.