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Market Reactions to the Closest Peer Firm's Analyst Revisions

Forthcoming, Accounting and Business Research

47 Pages Posted: 23 Jul 2016 Last revised: 31 Oct 2017

Ole-Kristian Hope

University of Toronto - Rotman School of Management

Wuyang Zhao

University of Texas at Austin

Date Written: October 30, 2017

Abstract

Prior analyst literature focuses on the impact of financial analysts on the firms they cover, and prior information-transfer literature concentrates on the externalities of information provided by management. This paper fills gaps in both streams of literature by examining the focal firm’s market reactions to the closest peer firm’s (identified by product similarity) analyst revisions. We find that the focal firm’s stock price reacts to the closest peer’s analyst revisions made by analysts who are not covering the focal firm. The focal firm’s CAR for a five-day window centered on the revision date is 0.54% higher if the peer firm’s analyst revision magnitude is in the top decile than if it is in the bottom decile. Cross-sectional tests show that the sensitivity of the focal firm’s market reactions to the peer firm’s revisions increases with the revision informativeness and the similarity between the focal firm and the peer firm. In addition, we find that focal firms do not react to peer firms’ revisions in industries with strong competition where the competitive effects cancel out the spillover effects. Finally, we find that the focal firm’s market reactions can predict its own future analyst revisions, suggesting that the reactions are at least partially rational.

Keywords: Peer Firms, Analyst Revisions, Market Reactions, Information Transfer

JEL Classification: M41, G14, G29, G30, G32, G34, G39

Suggested Citation

Hope, Ole-Kristian and Zhao, Wuyang, Market Reactions to the Closest Peer Firm's Analyst Revisions (October 30, 2017). Forthcoming, Accounting and Business Research. Available at SSRN: https://ssrn.com/abstract=2813244 or http://dx.doi.org/10.2139/ssrn.2813244

Ole-Kristian Hope (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

HOME PAGE: http://www.rotman.utoronto.ca/FacultyAndResearch/Faculty/FacultyBios/Hope.aspx

Wuyang Zhao

University of Texas at Austin ( email )

Austin, TX 78712
United States
5128262698 (Phone)

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