Role of Analysts: Following Momentum or Creating Momentum?

Abstract:     
This paper examines whether sell-side security analysts follow momentum or create momentum by themselves for recommending stocks. We employ an indirect method of testing the role of analysts by assigning projected recommendation scores for the neglected stocks to mitigate the so-called piggy-backing effect. Our results are not fully consistent with the notion that analysts follow past momentum to predict future stock recommendations. Using a data set of neglected stocks and creating projected recommendations of these stocks, we find evidence that analysts drive up the stocks’ momentum characteristics before recommending them. This finding suggests the fact that analysts not only follow momentum, rather they create momentum, at least to a great extent.

Number of Pages in PDF File: 47

Keywords: Analyst Recommendation, Covered Stocks, Neglected Stocks, Parallel Projection

JEL Classification: G1, G14, G24

working papers series