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Market Structure, Informed Trading, and Analysts' Recommendations

Published online by Cambridge University Press:  06 April 2009

Sok Tae Kim ,
Ji-Chai Lin  and
Myron B. Slovin
Sok Tae Kim
Affiliation:
Dongsuh Securities Co., LTD, Seoul 150-010, Korea
Ji-Chai Lin
Affiliation:
Department of Finance, Louisiana State University, Baton Rouge, LA 70803
Myron B. Slovin
Affiliation:
Department of Finance, Louisiana State University, Baton Rouge, LA 70803
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Abstract

We examine stock price behavior in response to initial coverage, buy recommendations that are pre-released to important clients before the stock market opens, and find a strong positive valuation effect at the open. On average, it takes five minutes of trading for NYSE/AMEX stocks and 15 minutes for NASDAQ stocks to reflect the private information contained in these analyst recommendations, so when informational asymmetry is high, the centralized call market is more efficient than a competitive, but fragmented dealer market. Public news release leaves share prices unaltered. Overall, competition among informed traders causes private information to be rapidly incorporated into stock prices.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 32 , Issue 4 , December 1997 , pp. 507 - 524
Copyright
Copyright © School of Business Administration, University of Washington 1997

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