Evaluating Analysts’ Value: Evidence from Recommendations around Stock Price Jumps
42 Pages Posted: 20 Sep 2009
Date Written: September 14, 2009
Recent literature documents that analyst recommendations tend to coincide with important corporate events, but offers mixed evidence on whether such recommendations have added value. In this paper, we use jump in stock price as a proxy for generic corporate “information event” and examine market reactions to recommendation revisions made around such events. Consistent with the literature, we find that analysts revise their recommendations more frequently on days with jumps in stock prices. Although such contemporaneous revisions account for only 10% of the sample, they explain up to a half (a third) of the initial market reactions for downgrades (upgrades). Nevertheless, when focusing on revisions made after stock price jumps - which are less likely influenced by confounding corporate events - we still find that these revisions contain significant price information. The added value is most pronounced for upgrades following positive jumps, with an extra 4.5% average return above those not following jumps over a 6-month horizon.
Keywords: Analyst Recommendations, Information Processing Ability, Stock Price Jumps, Corporate Event, Market Reactions
JEL Classification: G14, D83, G20
Suggested Citation: Suggested Citation