Does Analyst Optimism Fuel Stock Price Momentum?

Posted: 24 Nov 2015 Last revised: 16 Oct 2019

See all articles by Keming Li

Keming Li

Texas A&M University (TAMU) - San Antonio

Jimmy Lockwood

Southern Illinois University - Department of Finance

Larry J. Lockwood

Texas Christian University

Mohammad Riaz Uddin

Marshall University - Lewis College of Business

Date Written: October 15, 2019

Abstract

Researchers have struggled to find rational risk factors that explain momentum profits derived from buying prior winners and shorting prior losers. Behavioral explanations have been offered that focus on tendencies of investors to underreact to news and recommendations. Our study provides an alternative explanation centered on the behavior of sell-side analysts. We find a change in consensus recommendation from a hold to a buy is accompanied by an increase in momentum profits of 3.33 percent annually. Momentum profits fall, yet remain material, after the passage of Reg FD. Our results support a behavioral explanation in which investor cognitive biases are fueled by analyst recency and optimism biases. Contrary to prior studies, we find company fundamentals and information uncertainty alone do not explain momentum profits. Instead, analyst affirmation is a key catalyst.

* Preliminary Draft: Not for quotation

Note: Preliminary Draft: Not for quotation.

Keywords: sell-side analysts; cognitive biases; recommendation optimism; stock price momentum

JEL Classification: G1, G14, G24

Suggested Citation

Li, Keming and Lockwood, Jimmy and Lockwood, Larry J. and Uddin, Mohammad Riaz, Does Analyst Optimism Fuel Stock Price Momentum? (October 15, 2019). Available at SSRN: https://ssrn.com/abstract=2694937 or http://dx.doi.org/10.2139/ssrn.2694937

Keming Li

Texas A&M University (TAMU) - San Antonio ( email )

One University Way
San Antonio, TX 78224
United States

Jimmy Lockwood

Southern Illinois University - Department of Finance ( email )

Mail Code 4626
Carbondale, IL 62901-4626
United States
682.305.6095 (Phone)

HOME PAGE: http://https://business.siu.edu/people/finance/lockwood.html

Larry J. Lockwood (Contact Author)

Texas Christian University ( email )

Fort Worth, TX 76129
United States
817-921-7420 (Phone)
817-921-7227 (Fax)

Mohammad Riaz Uddin

Marshall University - Lewis College of Business ( email )

400 Hal Greer Boulevard
Huntington, WV 25755
United States

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