Fifty-Fifty. Stock Recommendations and Stock Prices. Effects and Benefits of Investment Advice in the Business Media

Leipzig University Working Paper No. 03-01

36 Pages Posted: 23 Apr 2003  

Thomas Schuster

Universit├Ąt Leipzig - Institute for Communication & Media Research

Date Written: March 2003

Abstract

The business media play an active role in influencing stock prices. Statistically significant excess returns at the time of the publication of stock recommendations have been documented many times. Frequently these abnormal gains begin to accumulate long before the publication date. In most cases they reach their highs on the day the recommendations are disseminated to the public. With few exceptions a price reversal sets in shortly thereafter: Excess returns in recommended stocks are at least partially given up. Many stocks now enter a period of underperformance, earning significant negative returns. The return reversions indicate that such stock price reactions are due to price pressure from "naive" investors hoping to profit from the experts. However, most media lack any real information that is not yet reflected in stock prices. In short: There is no evidence that stock recommendations published in the media offer any systematic opportunity to outperform the market. The evidence leads to the opposite conclusion: That investors who follow such advice will lose in the long run.

JEL Classification: G12, G14, G29, M41

Suggested Citation

Schuster, Thomas, Fifty-Fifty. Stock Recommendations and Stock Prices. Effects and Benefits of Investment Advice in the Business Media (March 2003). Leipzig University Working Paper No. 03-01. Available at SSRN: https://ssrn.com/abstract=387341 or http://dx.doi.org/10.2139/ssrn.387341

Thomas Schuster (Contact Author)

Universit├Ąt Leipzig - Institute for Communication & Media Research ( email )

Klostergasse 5
D-04109 Leipzig
Germany
49-341-9735753 (Phone)
49-341-9735799 (Fax)

Paper statistics

Downloads
349
Rank
68,478
Abstract Views
2,245