The Reluctant Analyst

60 Pages Posted: 14 Mar 2016 Last revised: 15 Mar 2016

See all articles by Dan Bernhardt

Dan Bernhardt

University of Illinois at Urbana-Champaign - Department of Economics

Zhijie Xiao

Boston College - Department of Finance and Department of Economics

Chi Wan

University of Massachusetts Boston - Department of Accounting and Finance

Multiple version iconThere are 2 versions of this paper

Date Written: January 13, 2012

Abstract

We estimate the dynamics of recommendations by financial analysts, uncovering the determinants of inertia in their recommendations. We provide overwhelming evidence that analysts revise recommendations reluctantly, introducing frictions to avoid frequent revisions. More generally, we characterize the sources underlying the infrequent revisions that analysts make. Publicly-available data matter far less for explaining recommendation dynamics than do the recommendation frictions and the long-lived information that analysts acquire that the econometrician does not observe. Estimates suggest that analysts structure recommendations strategically to generate profitable order flow from retail traders. We provide extensive evidence that our model describes how investors believe analysts make recommendations, and that investors value private information revealed by analysts’ recommendations.

Keywords: Financial Analysts, Recommendation Revisions, Recommendation Stickiness, Asymmetric Frictions, Duration, MCMC

JEL Classification: G2, G24

Suggested Citation

Bernhardt, Dan and Xiao, Zhijie and Wan, Chi, The Reluctant Analyst (January 13, 2012). Available at SSRN: https://ssrn.com/abstract=1984674 or http://dx.doi.org/10.2139/ssrn.1984674

Dan Bernhardt (Contact Author)

University of Illinois at Urbana-Champaign - Department of Economics ( email )

1206 South Sixth Street
Champaign, IL 61820
United States
217-244-5708 (Phone)

Zhijie Xiao

Boston College - Department of Finance and Department of Economics ( email )

United States

Chi Wan

University of Massachusetts Boston - Department of Accounting and Finance ( email )

Boston, MA 02125
United States

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