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How Do Analyst Recommendations Respond to Major News?

Published online by Cambridge University Press:  06 April 2009

Jennifer Conrad ,
Bradford Cornell ,
Wayne R. Landsman  and
Brian R. Rountree
Jennifer Conrad
Affiliation:
[email protected], Department of Finance, University of North Carolina at Chapel Hill, Chapel Hill, NC 27514
Bradford Cornell
Affiliation:
[email protected], California Institute of Technology, Division of the Humanities and Social Sciences, Pasadena, CA 91125
Wayne R. Landsman
Affiliation:
[email protected], Department of Accounting, University of North Carolina at Chapel Hill, Chapel Hill, NC 27514
Brian R. Rountree
Affiliation:
[email protected], Department of Accounting, Rice University, Houston, TX 77005.
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Abstract

We examine how analysts respond to public information when setting stock recommendations. We model the determinants of analysts' recommendation changes following large stock price movements. We find evidence of an asymmetry following large positive and negative returns. Following large stock price increases, analysts are equally likely to upgrade or downgrade. Following large stock price declines, analysts are more likely to downgrade. This asymmetry exists after accounting for investment banking relationships and herding behavior. This result suggests recommendation changes are “sticky” in one direction, with analysts reluctant to downgrade. Moreover, this result implies that analysts' optimistic bias may vary through time.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 41 , Issue 1 , March 2006 , pp. 25 - 49
Copyright
Copyright © School of Business Administration, University of Washington 2006

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