The Impact of Star Analyst Awards on Equity Markets: A Regression Discontinuity Design

Abstract

Using a regression discontinuity design, we study the causal impact of an influential star analyst award on market reaction and analysts’ post-award performance. We find that the award announcement leads to higher market reaction to stocks with preexisting recommendations from analysts who barely win the award than those from analysts who barely miss it, but the difference in market reaction fully reverses within 20 trading days. Evidence strongly suggests that attention trading and speculative trading over the anticipation of the overreaction are the main driving force while the signal of award winners’ ability plays little role. In addition, we find that analysts with award designations receive more resources from brokerages and perform better in earnings forecast than others in the year after the award announcement. Our findings highlight that investors may incorporate award information into their trading suboptimally and that award recognitions have long-lasting effects on sell-side research through resource reallocation.

Keywords: Star analyst, Public award, Attention trading

JEL Classification: G12, G4, M41, G14