Gauging Investor Perceptions of Analysts' Research Portfolio Structures
53 Pages Posted: 22 Oct 2008
Date Written: October, 20 2008
We study the relation between the market reaction to analyst recommendation changes and the structure of analysts' research portfolios. We find that analysts maintain more positive recommendations for stocks that belong to the "core industry" in their research portfolios, and are more likely to upgrade these core stocks. Consequently, analysts with more diversified research portfolios make less optimistic recommendations and are less likely to upgrade their recommendations. When we control for endogeneity in analysts' research portfolio choice, we find that the market's reaction is quite sensitive to research portfolio structure. Specifically, recommendation changes for non-core stocks generate stronger announcement returns and trading volume than for core stocks, and recommendation changes made by diversified analysts generate stronger market reactions than those made by specialized analysts. The patterns in trading volume are more pronounced for large trades. Finally, all the above documented patterns are significantly less pronounced after the passage of Regulation Fair Disclosure.
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