Working Paper: NBER ID: w14971
Authors: Roger K. Loh; Ren M. Stulz
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.
Keywords: analyst recommendations; stock price impact; market model; influential recommendations
JEL Codes: G14; G20; G24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| star analysts (G24) | probability of influential recommendation (C25) |
| away-from-consensus revisions (D80) | probability of influential recommendation (C25) |
| contemporaneous earnings forecasts (G17) | probability of influential recommendation (C25) |
| influential recommendations (D70) | stock volatility (G17) |
| influential recommendations (D70) | absolute changes in consensus earnings forecasts (G17) |
| influential recommendations (D70) | analyst activity (G24) |
| influential recommendations (D70) | share turnover (D16) |
| influential recommendations (D70) | larger forecast revisions (E17) |