Who Follows the Prophets? Analysts' Stock Recommendations and the Trading Response of Large and Small Traders

38 Pages Posted: 2 Feb 2005

See all articles by Wen He

Wen He

Monash University - Department of Accounting

G. Mujtaba Mian

Zayed University

Srinivasan Sankaraguruswamy

National University of Singapore (NUS) - Department of Accounting

Date Written: March 2005

Abstract

Consistent with the industry practice of linking analyst compensation to their reputation, we find that large traders primarily follow the advice of star analysts and ignore the recommendations of non-star analysts. They buy (sell) stocks for which star analysts revise their recommendations upwards (downwards). Small traders are also privy to analyst advice - they respond quickly to recommendation upgrades by buying the upgraded stocks. However, they do not sell stocks that are downgraded. Small traders, thus, seem unwilling or unable to respond to unfavorable firm-specific news even when the investment implications of the news are reasonably obvious. Small traders are also less discriminating between star and non-star analysts. Our findings not only help understand the clientele of analysts' stock recommendations but also contribute to the literature that focuses on the response of small investors to firm-specific information events.

Keywords: Recommendations, trading, large traders, small traders

JEL Classification: D14, D21, G24, G29

Suggested Citation

He, Wen and Mian, G. Mujtaba and Sankaraguruswamy, Srinivasan, Who Follows the Prophets? Analysts' Stock Recommendations and the Trading Response of Large and Small Traders (March 2005). Available at SSRN: https://ssrn.com/abstract=651703 or http://dx.doi.org/10.2139/ssrn.651703

Wen He

Monash University - Department of Accounting ( email )

Building H, Level 3
Caulfield campus
Melbourne, Victoria 3800
Australia

G. Mujtaba Mian (Contact Author)

Zayed University

P.O. Box 19282
College of Business
Dubai, Dubai 19282
United Arab Emirates
+971568120604 (Phone)

Srinivasan Sankaraguruswamy

National University of Singapore (NUS) - Department of Accounting ( email )

1 Business Link
Singapore, 117592
Singapore
+65 6874 4473 (Phone)
+65 6779 2083 (Fax)

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