How Do Analysts Recommendations Respond to Major News?

49 Pages Posted: 17 Sep 2004

See all articles by Jennifer S. Conrad

Jennifer S. Conrad

University of North Carolina Kenan-Flagler Business School

Bradford Cornell

Anderson Graduate School of Management, UCLA

Wayne R. Landsman

University of North Carolina Kenan-Flagler Business School

Brian Rountree

Rice University - Jesse H. Jones Graduate School of Business

Date Written: August 2004

Abstract

This study examines how analysts respond to public information when setting their stock recommendations. Specifically, for a sample of stocks that experience large stock price movements, we model the determinants of analysts' recommendation changes. Using an ordered probit model based on all available IBES stock recommendations from 1993 to 1999, we find evidence of an asymmetry following large positive and negative returns. Large stock price changes are associated with more frequent changes in analyst's recommendations. Following large stock price increases, analysts are equally likely to upgrade or downgrade. Following large stock price declines, however, analysts are much more likely to downgrade the company's stock. This asymmetry exists even after accounting for investment banking relationships and herding behavior. Further, this asymmetry cannot be explained by differences in the predictability of future returns. This result suggests that recommendation changes are "sticky" in one direction, with analysts reluctant to downgrade securities. Moreover, this result implies that analysts' optimistic bias is not static, but varies through time.

Keywords: Analyst recommendations

JEL Classification: G14, G29, M41

Suggested Citation

Conrad, Jennifer S. and Cornell, Bradford and Landsman, Wayne R. and Rountree, Brian Robert, How Do Analysts Recommendations Respond to Major News? (August 2004). Available at SSRN: https://ssrn.com/abstract=591802 or http://dx.doi.org/10.2139/ssrn.591802

Jennifer S. Conrad

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

Bradford Cornell

Anderson Graduate School of Management, UCLA ( email )

Pasadena, CA 91125
United States
626 833-9978 (Phone)

Wayne R. Landsman

University of North Carolina Kenan-Flagler Business School ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States
919-962-3221 (Phone)
919-962-4727 (Fax)

Brian Robert Rountree (Contact Author)

Rice University - Jesse H. Jones Graduate School of Business ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States

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