The Reluctant Analyst
60 Pages Posted: 14 Mar 2016 Last revised: 15 Mar 2016
Date Written: January 13, 2012
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: Suggested Citation