What Determines the Market Impact of Stock Recommendations?

43 Pages Posted: 19 May 2003

See all articles by Xia Chen

Xia Chen

Singapore Management University

Qiang Cheng

Singapore Management University

Date Written: March 1, 2003

Abstract

In this paper, we investigate determinants of the market impact of stock recommendations issued by sell-side financial analysts. We propose a simple framework for understanding the process that financial analysts use to issue stock recommendations. The framework yields three testable predictions: The market impact of stock recommendations increases with analysts' perceived ability and investors' uncertainty about firm value, and decreases with analyst experience after controlling for analysts' innate ability. We empirically test these predictions and find consistent results. Using Institutional Investor All-American analyst status to proxy for high perceived ability and return volatility for uncertainty about firm value, we find that the market impact of recommendations increases with analysts' perceived ability and return volatility. Using the number of quarters an analyst has been issuing recommendations or earnings forecasts to proxy for experience, we find that the market impact of recommendations decreases with analyst experience after controlling for analyst-company specific effects. These results hold when we control for other characteristics of financial analysts and brokerage firms that might affect the market impact of stock recommendations. The results hold for recommendation revisions as well.

Keywords: stock recommendations, analysts' perceived ability, uncertainty about firm value, analyst experience

JEL Classification: G12, G24, G29, J44

Suggested Citation

Chen, Xia and Cheng, Qiang, What Determines the Market Impact of Stock Recommendations? (March 1, 2003). Sauder School of Business Working Paper, Available at SSRN: https://ssrn.com/abstract=385524 or http://dx.doi.org/10.2139/ssrn.385524

Xia Chen

Singapore Management University ( email )

60 Stamford Rd.
Singapore 178900
Singapore

Qiang Cheng (Contact Author)

Singapore Management University ( email )

60 Stamford Road
Singapore, 178900
Singapore

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