Evaluating Analysts' Value: Evidence from Recommendations Around Stock Price Jumps
46 Pages Posted: 26 Mar 2010
Date Written: March 15, 2010
Recent literature documents that the issuance of analyst recommendations tends to coincide with important corporate events, but offers mixed evidence on whether such recommendations have added value. In this paper, we use large discontinuous stock price changes, known as jumps, to proxy for corporate “events” with significant information shock and reexamine the potential value of analyst revisions. Consistent with the literature, we find that analysts revise their recommendations more frequently on days with jumps in stock prices. These contemporaneous revisions, although accounting for only 10% of the revision sample, 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 average of abnormal 4.5% return over a 6-month horizon.
Keywords: Analyst Recommendations, Information Processing Ability, Stock Price Jumps, Corporate Event, Market Reactions
JEL Classification: G14, G24
Suggested Citation: Suggested Citation