When are Analyst Recommendation Changes Influential?

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

51 Pages Posted: 18 May 2009 Last revised: 14 Nov 2013

Roger Loh

Singapore Management University - Lee Kong Chian School of Business

René M. Stulz

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Multiple version iconThere are 2 versions of this paper

Date Written: August 26, 2010

Abstract

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.

Keywords: Paradigm shift, Security Analysts, Stock Recommendations

JEL Classification: G14, G20, G24

Suggested Citation

Loh, Roger and Stulz, René M., When are Analyst Recommendation Changes Influential? (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. Available at SSRN: https://ssrn.com/abstract=1401487

Roger Loh (Contact Author)

Singapore Management University - Lee Kong Chian School of Business ( email )

Lee Kong Chian School of Business
50 Stamford Rd
Singapore, 178899
Singapore

HOME PAGE: http://www.mysmu.edu/faculty/rogerloh/

Rene M. Stulz

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

HOME PAGE: http://www.cob.ohio-state.edu/fin/faculty/stulz

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

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