When are Analyst Recommendation Changes Influential?
Singapore Management University
Rene M. Stulz
Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)
August 26, 2010
Review of Financial Studies, Forthcoming
Fisher College of Business Working Paper No. 2009-03-007
Dice Center Working Paper No. 2009-7
ECGI - Finance Working Paper No. 251/2009
Typically, the literature evaluates the significance of analyst recommendation changes by their average stock-price impact. With such an approach, recommendation changes can have a significant impact even if no recommendation change has a stock-price impact large enough to be noticed at the stock level. We call a recommendation change that affects the stock price sufficiently to be detectable at the stock level an influential recommendation change and investigate the extent to which recommendation changes are influential. We show that roughly 12% of recommendation changes are influential. We find a similar fraction of recommendation changes are influential using an alternative definition which looks at abnormal turnover at the stock level. Leader, star, and previously influential analysts are more likely to make influential recommendation changes. Recommendation changes away from consensus or accompanied by any sort of earnings forecast are more likely to be influential. Growth, small, high institutional ownership, and high analyst forecast dispersion firms are also more likely to have influential recommendation changes. Strikingly, the frequency of influential recommendation changes increases after Reg FD and the Global Analyst Settlement. Finally, we show that impactful sell-side research tends to be communicated through a recommendation change rather than an earnings forecast.
Number of Pages in PDF File: 51
Keywords: Paradigm shift, Security Analysts, Stock Recommendations
JEL Classification: G14, G20, G24Accepted Paper Series
Date posted: May 18, 2009 ; Last revised: September 27, 2010
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