Hostname: page-component-78c5997874-j824f Total loading time: 0 Render date: 2024-11-04T17:53:04.576Z Has data issue: false hasContentIssue false

How Do Analyst Recommendations Respond to Major News?

Published online by Cambridge University Press:  06 April 2009

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.

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
Copyright
Copyright © School of Business Administration, University of Washington 2006

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Barber, B. M.; Lehavy, R.; and Trueman, B.. “Comparing the Stock Recommendation Performance of Investment Banks and Independent Research Firms.” Working Paper, Univ. of California, Los Angeles (2004).Google Scholar
Bikhchandani, S.; Hirshleifer, D.; and Welch, I.. “A Theory of Fads, Fashion, Custom, and Cultural Change as Informational Cascades.” Journal of Political Economy, 100 (1992), 9921026.CrossRefGoogle Scholar
Block, S. B. “A Study of Financial Analysts: Practice and Theory.” Financial Analysts Journal, 55 (1999), 8695.Google Scholar
Blume, M., and Stambaugh, R. F.. “Biases in Computed Returns: An Application to the Size Effect.” Journal of Financial Economics, 12 (1983), 387404.CrossRefGoogle Scholar
Boni, L., and Womack, K. L.. “Analysts, Industries, and Price Momentum.” Journal of Financial and Quantitative Analysis, 41 (2006), 85109.Google Scholar
Bradshaw, M. T.How Do Analysts Use Their Earnings Forecasts in Generating Stock Recommendations?Accounting Review, 79 (2004), 2550.CrossRefGoogle Scholar
Cornell, B.Is the Response of Analysts to Information Consistent with Fundamental Valuation: The Case of Intel.” Financial Management, 30 (2001), 113136.Google Scholar
Finger, C., and Landsman, W. R.. “What Do Analysts' Stock Recommendations Really Mean?Review of Accounting and Finance, 2 (2003), 6585.CrossRefGoogle Scholar
Green, T. C.The Value of Client Access to Analyst Recommendations.” Journal of Financial and Quantitative Analysis, 41 (2006), 124.Google Scholar
Green, W. H.Econometric Analysis, 3rd ed.Upper Saddle River, NJ: Prentice Hall (1997).Google Scholar
Hong, H., and Kubik, J.. “Analyzing the Analysts: Career Concerns and Biased Earnings Forecasts.” Journal of Finance, 58 (2003), 313351.Google Scholar
Hong, H.; Kubik, J.; and Salomon, A.. “Security Analysts' Career Concerns and Herding of Earnings Forecasts.” RAND Journal of Economics, 31 (2000), 121144.Google Scholar
Houston, J.; James, C.; and Karceski, J.. “What a Difference a Month Makes: Stock Analyst Valuations Following Initial Public Offerings.” Journal of Financial and Quantitative Analysis, 41 (2006), 111137.Google Scholar
Jegadeesh, N., Kim, J., Krische, S., and Lee, C. M. C.. “Analyzing the Analysts: When Do Recommendations Add Value?Journal of Finance, 59 (2004), 10831124.CrossRefGoogle Scholar
Kothari, S. P., and Warner, J. B.. “Measuring Long-Horizon Security Price Performance.” Journal of Financial Economics, 43 (1997), 301339.Google Scholar
Lin, H., and McNichols, M. F.. “Underwriting Relationships, Analysts' Earnings Forecasts and Investment Recommendations.” Journal of Accounting and Economics, 25 (1998), 101127CrossRefGoogle Scholar
Lin, H.; McNichols, M. F.; and O'Brien, P. C.. “Analyst Impartiality and Investment Banking Relationships.” Working Paper, Stanford Univ. (2004).Google Scholar
The New York Times. “30 States Join Wall Street Probe,” 05 24, 2002.Google Scholar
Ohlson, J. A.Earnings, Book Values, and Dividends in Equity Valuation.” Contemporary Accounting Research, 11 (1995), 661687.Google Scholar
Opdyke, J. D. “Many Analysts Found to Invest In the Companies They Covered.” The Wall Street Journal, 08 1, 2001, C1.Google Scholar
Ryan, P., and Taffler, R. J.. “Are Economically Significant Stock Returns and Trading Volumes Driven by Firm-Specific News Releases?Journal of Business Finance & Accounting, 31 (2004), 4982.Google Scholar
Stickel, S. E.The Anatomy of the Performance of Buy and Sell Recommendations.” Financial Analysts Journal, 51 (1995), 2539.CrossRefGoogle Scholar
Tully, S. “Betrayal on Wall Street.” Fortune Magazine, 05 14, 2001, 98103.Google Scholar
Welch, I.Herding among Security Analysts.” Journal of Financial Economics, 58 (2000), 369396.CrossRefGoogle Scholar
Womack, K. L.Do Brokerage Analysts' Recommendations Have Investment Value?Journal of Finance, 51 (1996), 137167.CrossRefGoogle Scholar