How Informative are Analyst Recommendations and Insider Trades?
George Mason University
Lilian K. Ng
York University - Schulich School of Business
University of Central Florida - College of Business Administration
April 12, 2005
AFA 2006 Boston Meetings Paper
This study jointly evaluates the informativeness of insider trades and analyst recommendations. We show that the two activities often generate contradictory signals. Insiders in aggregate buy more shares when their firm's stock is unfavorably recommended or downgraded by analysts than when it is favorably recommended or upgraded. This result is robust to various controls such as varying degrees of analyst coverage, firm size, book-to-market ratios, and stock price momentum. We find that analyst recommendations affect insider trading decisions, but not vice versa. Our further analysis shows that insider trading is informative when signaling positive information, and analyst recommendations are informative when conveying negative information. The overall results imply that corporate insiders and financial analysts do not substitute each other's informational role in the financial market.
Number of Pages in PDF File: 46
Keywords: Analyst recommendations, Insider trades
JEL Classification: G14
Date posted: March 21, 2005