The Confirmation Effect of Analyst Recommendation Reiterations
29 Pages Posted: 13 Jul 2016 Last revised: 27 Sep 2017
Date Written: September 26, 2017
The vast majority of reports written by sell-side equity analysts conclude with a reiteration of the analyst’s existing recommendation on a firm’s stock. Yet there is a disproportionate amount of research that focuses on the market reactions of changes in recommendations and a prevailing sense that reiterations do not matter. In this paper, we test the hypothesis that reiterations of recommendations serve to resolve information uncertainty since the original recommendation was published and that they give rise to market reactions in the direction of the original recommendation, which we call a confirmation effect. Using a sample of analyst reports that do not contain any changes in recommendations, earnings forecasts, or price targets, we focus solely on reiterations and show that they are associated with proxies for information content, reductions in information uncertainty, and return reactions consistent with a confirmation effect.
Keywords: Analysts, Analyst recommendations, Reiterations, Confirmation effect
JEL Classification: M41, G24
Suggested Citation: Suggested Citation