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Information Misweighting and Stock Recommendations

Author

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  • Martinez, Jose Vicente

    () (Swedish Institute for Financial Research)

Abstract

I provide evidence that analysts whose earnings forecast revisions showed signs of greater exaggeration in the past make recommendation changes that lead to lower abnormal returns than their peers. Interpreting stock recommendations as a forecast of future abnormal returns, I show that this evidence is consistent with the hypothesis that analysts who typically exaggerate or overstate the weight of their private information when issuing forecasts also do so when making recommendations. I also show that past earnings forecast provide incremental information about analysts' recommending behavior beyond that contained in past recommendations.

Suggested Citation

  • Martinez, Jose Vicente, 2007. "Information Misweighting and Stock Recommendations," SIFR Research Report Series 59, Institute for Financial Research.
  • Handle: RePEc:hhs:sifrwp:0059
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    References listed on IDEAS

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    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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    4. Welch, Ivo, 2000. "Herding among security analysts," Journal of Financial Economics, Elsevier, vol. 58(3), pages 369-396, December.
    5. Li, Xi, 2005. "The persistence of relative performance in stock recommendations of sell-side financial analysts," Journal of Accounting and Economics, Elsevier, vol. 40(1-3), pages 129-152, December.
    6. Narasimhan Jegadeesh & Joonghyuk Kim & Susan D. Krische & Charles M. C. Lee, 2004. "Analyzing the Analysts: When Do Recommendations Add Value?," Journal of Finance, American Finance Association, vol. 59(3), pages 1083-1124, June.
    7. Alexander Ljungqvist & Christopher Malloy & Felicia Marston, 2009. "Rewriting History," Journal of Finance, American Finance Association, vol. 64(4), pages 1935-1960, August.
    8. Carhart, Mark M, 1997. " On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
    9. Harrison Hong & Jeffrey D. Kubik & Amit Solomon, 2000. "Security Analysts' Career Concerns and Herding of Earnings Forecasts," RAND Journal of Economics, The RAND Corporation, vol. 31(1), pages 121-144, Spring.
    10. repec:bla:joares:v:28:y:1990:i:2:p:409-417 is not listed on IDEAS
    11. Zitzewitz, Eric, 2001. "Measuring Herding and Exaggeration by Equity Analysts and Other Opinion Sellers," Research Papers 1802, Stanford University, Graduate School of Business.
    12. Qi Chen & Wei Jiang, 2006. "Analysts' Weighting of Private and Public Information," Review of Financial Studies, Society for Financial Studies, vol. 19(1), pages 319-355.
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    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Information misweighting; stock recommendations; earnings forecasts; financial analysts;

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • J44 - Labor and Demographic Economics - - Particular Labor Markets - - - Professional Labor Markets and Occupations

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