Financial Analysts: Market Reaction to Recommendation Changes

34 Pages Posted: 4 Mar 2005

See all articles by Enrico Maria Cervellati

Enrico Maria Cervellati

Department of Management - Ca' Foscari University of Venice

Antonio Carlo Francesco Della Bina

University of Bologna - Department of Management

Stefano Giulianelli

Passepartout S.A.

Date Written: December 31, 2005

Abstract

The main objective of the paper is to examine the market reaction to the reports issued by financial analysts in the Italian Stock Exchange, and to define the informative contribution embedded on them as well as their investment value. We use a unique dataset that includes all the reports on IPOs in the Italian stock market and analyze the impact of the recommendation changes calculating abnormal returns and abnormal volumes associated with the dissemination of the report. Prices and volumes are influenced by recommendation changes in a statistically significantly manner, while abnormal returns and volumes in case of upgrades or downgrade are symmetrical and of almost the same magnitude, testifying, at least to a certain extent, the forecasting ability of the analyst and the informative value of the reports. Abnormal returns and volumes are present even before the official dissemination of the report to the market, but also before the report date, i.e. the one in which the report should be given to the private clients of the analysts. It is possible to advance two main hypotheses to explain this evidence. First, the market is not fully informationally efficient, because of leakage of information or by insider trading; second: it is possible that other important price sensitive news had preceded the diffusion of the report, that, in this case, would have reported in his evaluation just the new information on the company.

Keywords: Analysts, market efficiency, event study, reports, recommendations

JEL Classification: G14

Suggested Citation

Cervellati, Enrico Maria and Della Bina, Antonio Carlo Francesco and Giulianelli, Stefano, Financial Analysts: Market Reaction to Recommendation Changes (December 31, 2005). Available at SSRN: https://ssrn.com/abstract=676224 or http://dx.doi.org/10.2139/ssrn.676224

Enrico Maria Cervellati (Contact Author)

Department of Management - Ca' Foscari University of Venice

Fondamenta San Giobbe 873 Cannaregio
Venice, Venice 30121
Italy

Antonio Carlo Francesco Della Bina

University of Bologna - Department of Management ( email )

Piazza Scaravilli 1
Bologna, Bologna 40126
Italy

Stefano Giulianelli

Passepartout S.A. ( email )

c/o World Trade Center
Via Consiglio dei Sessanta, 99
47891 Dogana

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