Bold Stock Recommendations: Informative or Worthless?

Posted: 16 Aug 2019

See all articles by Dan Palmon

Dan Palmon

Rutgers, The State University of New Jersey - Accounting & Information Systems

Bharat Sarath

Rutgers, The State University of New Jersey - Accounting

Hua Christine Xin

University of Louisville

Date Written: July 23, 2019

Abstract

We select a small set of recommendations that lie in the upper and lower tail of the empirical distribution of divergences between a recommendation, and the consensus over the window (-30, -1)-days prior to that recommendation. We classify these extremely divergent recommendations as bold, and then subdivide them into informative bold recommendations that lead other analysts (leading-bold) and those that are ignored by other analysts (contra-bold) based on the consensus change in the thirty days after the announcement. We focus on the information conveyed to the market by these bold, leading-bold, and contra-bold recommendations through their effects on Cumulative Abnormal Returns (CAR). We find that bold recommendations are not anticipated by market participants (CAR’s are negative before a bold buy and positive before a bold sell). The next finding is that the market responds strongly to both leading and contra bold recommendations over the (0, +4) window and that these reactions are stronger than that to non-bold recommendations. In contrast, over the longer (0, +30)-day window, leading-bold recommendations earn additional returns whereas contra-bold ones reverse significantly due to lack of confirmation. The overall pattern is one of rational market reaction both in the short and long windows. We support the rationality of the market reaction by showing that the percentage of leading-bold recommendations exceeds that of contra-bold recommendations, and that these two types of recommendations cannot be separated using observable analyst characteristics such as experience or brokerage size.

Keywords: Bold recommendations, Contra-bold/leading-bold/non-bold recommendations, Financial analysts, Cumulative abnormal returns

JEL Classification: G14, G20, D82, D83

Suggested Citation

Palmon, Dan and Sarath, Bharat Sarrukai and Xin, Hua Christine, Bold Stock Recommendations: Informative or Worthless? (July 23, 2019). Contemporary Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3436964

Dan Palmon

Rutgers, The State University of New Jersey - Accounting & Information Systems ( email )

96 New England Avenue, #18
Summit, NJ 07901-1825
United States
201-648-5472 (Phone)
201-648-1283 (Fax)

Bharat Sarrukai Sarath (Contact Author)

Rutgers, The State University of New Jersey - Accounting ( email )

94 Rockafeller Road
Piscataway, NJ 08854
United States

Hua Christine Xin

University of Louisville ( email )

School of Accountancy #137
College of Business
Louisville, KY Kentucky 40292
United States
(502)852-4816 (Phone)

HOME PAGE: http://business.louisville.edu/faculty-and-staff-directory/acct/

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