Impact of Analysts' Recommendations on Stock Prices: Evidence from Karachi Stock Exchange

Abstract

This study analyzes the impact of analysts’ recommendations on stock prices in the Karachi Stock Exchange (KSE) using the Morning Shout, a report published daily by Khadim Ali Shah Bukhari Securities Ltd (KASB) which includes buy and sale recommendations about different stocks. Using event study methodology, a sample period of 2 years and 277 recommendations were analyzed. Market model is used to estimate abnormal returns for stocks around the recommendation dates. Results of the study indicate that analysts’ recommendations do create positive abnormal returns for investors and these abnormal returns are the result of the information content. Results show that stocks earned on average 0.41% abnormal return on the day of publication of recommendations and continued to earn abnormal returns till the 10th day of publication of recommendations. Further analysis shows that there is a possibility of information leakage prior to the publication of recommendations, as these securities earned positive abnormal returns prior to the publication of Morning Shout.

Keywords: event study, market model, analysts recommendations, market efficiency

JEL Classification: G14, G24