On the Information Role of Stock Recommendation Revisions

Abstract

We examine the information transmission role of stock recommendation revisions by sell-side security analysts. Revisions are associated with economically insignificant mean price reactions and often piggyback on recent news, events, long-term momentum, and short-run contrarian return predictors, typically downgrading after bad news and upgrading after good news. However, the revisions are usually information-free for investors. The findings go against the long-standing view that recommendations are an important means by which analysts assimilate information into stock prices. They disagree with the view of policymakers that analysts’ stock picks materially impact stock prices.

Keywords: analysts’ recommendations, brokerage research, capital markets, investment banking, market efficiency, security analysts

JEL Classification: D82, G11, G12, G14, G24, G28, K22, M41