The Impact of NASD Rule 2711 and NYSE Rule 472 on Analyst Behavior - The Strategic Timing of Recommendations on Weekends

Forthcoming in Journal of Business, Finance and Accounting

44 Pages Posted: 10 Nov 2015 Last revised: 1 Aug 2016

See all articles by Yi Dong

Yi Dong

Shanghai University of Finance and Economics

Nan Hu

Stevens Institute of Technology - School of Business

Date Written: April 29, 2016

Abstract

Amendments to NASD Rule 2711 and NYSE Rule 472, enacted in May 2002, mandate that sell-side analysts disclose the distribution of their security recommendations by category of buy, hold, and sell. This regulation enhances the transparency of analysts’ information and mitigates the long-recognized optimistic bias in their recommendations. However, we find that analysts are more likely to issue sell recommendations or downgrade revisions on weekends when investors have limited attention after these rule changes. This pattern is more pronounced for prestigious analysts, who are more likely to influence stock prices. Market reaction tests reveal an incomplete immediate response and a greater drift to unfavorable recommendations issued on weekends. Finally, analysts who are more likely to release unfavorable recommendations on weekends exhibit higher future forecast accuracy. Our findings suggest that, while these regulatory changes effectively reduce analysts’ optimistic bias, they are also associated with an increased prevalence of a different form of distortion in the capital market.

Keywords: analyst recommendations; limited attention; market inefficiency; weekend; NASD Rule 2711; NYSE Rule 472

JEL Classification: G14; G18; G24

Suggested Citation

Dong, Yi and Hu, Nan, The Impact of NASD Rule 2711 and NYSE Rule 472 on Analyst Behavior - The Strategic Timing of Recommendations on Weekends (April 29, 2016). Forthcoming in Journal of Business, Finance and Accounting. Available at SSRN: https://ssrn.com/abstract=2560103 or http://dx.doi.org/10.2139/ssrn.2560103

Yi Dong

Shanghai University of Finance and Economics ( email )

Shanghai, Shanghai 200433
China

Nan Hu (Contact Author)

Stevens Institute of Technology - School of Business ( email )

Hoboken, NJ 07030
United States

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