When Security Analysts Talk, Who Listens?

The Accounting Review, Vol.82, pp 1227-1253, Feb. 2007

Posted: 26 Apr 2005 Last revised: 10 Aug 2014


Regulators' interest in analyst reports stems from the belief that small investors are unaware of the conflicts sell-side analysts face and may, as a consequence, be misled into making suboptimal investment decisions. We examine who trades on security analyst stock recommendations by extending prior research to focus on investor-specific responses to revisions. We find that both large and small traders react to analyst reports; however, large investors appear to trade more than small traders in response to the information conveyed by the analyst's recommendation and earnings forecast revision (proxied by the magnitudes of the recommendation change and the earnings forecast revision, respectively). We also find that small investors do not fully account for the effects of analysts' incentives on the credibility of analyst reports, as captured by the type of recommendation (i.e., upgrade versus downgrade or buy versus sell). In particular, small investors not only trade more than large investors following upgrade and buy recommendations, but also trade more following upgrade and buy recommendations than they do following downgrade and hold/sell recommendations. Furthermore, we observe that, on average, small traders are net purchasers following recommendation revisions regardless of the type of the recommendation; large traders tend to be net sellers following downgrades and sells. Consequently, large traders generate statistically positive returns from their trading, while small traders generate statistically negative returns from their trading. These findings are consistent with large investors being more sophisticated processors of information, and provide some support for regulators' concerns that analysts may more easily mislead small investors.

Keywords: Security analysts, Stock recommendations, Trading volume, Investor sophistication

JEL Classification: G11, G14, G24, G28, G29, M41

Suggested Citation

Mikhail, Michael B. and Walther, Beverly R. and Willis, Richard H., When Security Analysts Talk, Who Listens?. The Accounting Review, Vol.82, pp 1227-1253, Feb. 2007, Available at SSRN: https://ssrn.com/abstract=709801 or http://dx.doi.org/10.2139/ssrn.709801

Michael B. Mikhail (Contact Author)

University of Illinois at Chicago - College of Business Administration ( email )

601 South Morgan Street
11th Floor
Chicago, IL 60607
United States

Beverly R. Walther

Northwestern University - Department of Accounting Information & Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States
847-467-1595 (Phone)
847-467-1202 (Fax)

Richard H. Willis

Vanderbilt University - Accounting ( email )

Nashville, TN 37203
United States
615-343-1050 (Phone)
615-343-7177 (Fax)

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