Working Paper: NBER ID: w9246
Authors: Paul Asquith; Michael B. Mikhail; Andrea S. Au
Abstract: This paper investigates the market reaction to the information released in security analyst reports. It shows that the market reacts significantly and positively to changes in recommendation levels, earnings forecasts, and price targets. While changes in price targets and earnings forecasts both provide information to the market, revisions in price targets have a larger and more significant impact than comparable revisions in earnings forecasts. The text of the report is also a significant source of information as it provides the justifications supporting an analyst's summary opinion. When all of this information is considered simultaneously, some of it, notably the earnings forecasts, is subsumed. The results further show that analysts correctly predict price targets slightly over 50% of the time. Finally, the valuation methodology used does not seem to be correlated with either the market's reaction or the analyst's accuracy.
Keywords: No keywords provided
JEL Codes: G11; G14; G24; M41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Changes in recommendation levels, earnings forecasts, and price targets (G17) | Market returns (G19) |
| Price target changes (G13) | Market reactions (G10) |
| Earnings forecast revisions (G17) | Market reactions (G10) |
| Strength of justifications in analyst reports (G24) | Market reactions (G10) |
| Analyst predictions (G17) | Actual market outcomes (D41) |
| Changes in stock recommendations (G24) | Market reactions (G10) |
| Recommendation upgrades (L15) | Market reactions (G10) |
| Valuation methodology used by analysts (G24) | Market reactions (G10) |