Hostname: page-component-586b7cd67f-t7fkt Total loading time: 0 Render date: 2024-11-30T21:03:28.521Z Has data issue: false hasContentIssue false
  • English
  • Français

The Cross Section of Analyst Recommendations

Published online by Cambridge University Press:  06 April 2009

Sorin Sorescu  and
Avanidhar Subrahmanyam
Sorin Sorescu
Affiliation:
[email protected], Mays Business School, Texas A&M University, College Station, TX 77843
Avanidhar Subrahmanyam
Affiliation:
[email protected], The Anderson School, University of California at Los Angeles, 110 Westwood Plaza, Los Angeles, CA 90095.
Get access Rights & Permissions [Opens in a new window]

Abstract

We analyze the price reaction to analysts' revisions by testing the Griffin and Tversky (1992) hypothesis that agents place emphasis on the strength of the signal (the dramatic nature of the event) and may de-emphasize the weight (the ability of the analyst making the recommendation). Two attributes, namely, years of experience and the reputation of the analysts' brokerage houses form proxies for analyst ability (or weight) that we validate by documenting that revisions by high ability analysts outperform those by low ability ones. We find evidence of return persistence following small (low strength) revisions by high ability analysts and the opposite return pattern following large (high strength) revisions of low ability analysts, consistent with the arguments of Griffin and Tversky (1992). Our study provides an empirical link between evidence on individual decision making and stock market returns, and also helps promote an understanding of the analyst industry as well as its interaction with the investing population.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 41 , Issue 1 , March 2006 , pp. 139 - 168
Copyright
Copyright © School of Business Administration, University of Washington 2006

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Abreu, D., and Brunnermeier, M. “Synchronization Risk and Delayed Arbitrage.” Journal of Financial Economics, 66 (2002), 341–360.CrossRefGoogle Scholar
Amihud, Y., and Mendelson, H. “Asset Pricing and the Bid-Ask Spread.” Journal of Financial Economics, 17 (1986), 223–249.CrossRefGoogle Scholar
Anderson, R., and Reeb, R. “Founding Family Ownership and Firm Performance: Evidence from the S&P 500.” Journal of Finance, 58 (2003), 1301–1328.CrossRefGoogle Scholar
Baker, M., and Stein, J. “Market Liquidity as a Sentiment Indicator.” Journal of Financial Markets, 7 (2004), 271–299.CrossRefGoogle Scholar
Barber, B.; Lehavy, R.; McNichols, M.; and Trueman, B. “Can Investors Profit from the Prophets? Security Analyst Recommendations and Stock Returns.” Journal of Finance, 56 (2001), 531–563.CrossRefGoogle Scholar
Barber, B.; Lehavy, R.; and Trueman, B. “Comparing the Stock Recommendations of Investment Banks and Independent Research Firms.” Working Paper, Univ. of California at Davis (2005).CrossRefGoogle Scholar
Barber, B., and Loeffler, D. “The ‘Dart Board’ Column: Second-Hand Information and Price Pressure.” Journal of Financial and Quantitative Analysis, 28 (1993), 273–284.CrossRefGoogle Scholar
Barberis, N.; Shleifer, A.; and Vishny, R. “A Model of Investor Sentiment.” Journal of Financial Economics, 49 (1998), 307–343.CrossRefGoogle Scholar
Benartzi, S., and Thaler, R. “Naïve Diversification Strategies in Defined Contribution Saving Plans.” American Economic Review, 91 (2001), 79–98.CrossRefGoogle Scholar
Boehme, R.; Danielsen, B.; and Sorescu, S. “Short Sale Constraints, Differences of Opinion, and Overvaluation.” Journal of Financial and Quantitative Analysis, forthcoming (2006).CrossRefGoogle Scholar
Boni, L., and Womack, K. “Analysts, Industries, and Price Momentum.” Journal of Financial and Quantitative Analysis, 41 (2006), 85–109.Google Scholar
Brav, A., and Lehavy, R. “An Empirical Analysis of Analysts' Target Prices: Short-Term Informativeness and Long-Term Dynamics.” Journal of Finance, 58 (2003), 1933–1967.CrossRefGoogle Scholar
Brennan, M., and Subrahmanyam, A. “Investment Analysis and Price Formation in Securities Markets.” Journal of Financial Economics, 38 (1995), 361–381.CrossRefGoogle Scholar
Brown, S., and Warner, J. “Using Daily Stock Returns: The Case of Event Studies.” Journal of Financial Economics, 14 (1985), 3–31.CrossRefGoogle Scholar
Canina, L.; Michaely, R.; Thaler, R.; and Womack, K. “Caveat Compounder: A Warning About the Daily CRSP Equal-Weighted Index to Compute Long-Run Excess Returns.” Journal of Finance, 53 (1998), 403–416.CrossRefGoogle Scholar
Carhart, M. “On Persistence in Mutual Fund Performance.” Journal of Finance, 52 (1997), 57–82.CrossRefGoogle Scholar
Carter, R.; Dark, F.; and Singh, A.. “Underwriter Reputation, Initial Returns, and the Long-Run Performance of IPO Stocks.” Journal of Finance, 53 (1998), 285–311.CrossRefGoogle Scholar
Carter, R., and Manaster, S. “Initial Public Offerings and Underwriter Reputation.” Journal of Finance, 45 (1990), 1045–1067.CrossRefGoogle Scholar
Chevalier, J., and Ellison, G. “Are Some Mutual Fund Managers Better than Others? Cross-Sectional Patterns in Behavior and Performance.” Journal of Finance, 54 (1999), 875–899.CrossRefGoogle Scholar
Chordia, T., and Shivakumar, L. “Momentum, Business Cycle, and Time-Varying Expected Returns.” Journal of Finance, 57 (2002), 985–1019.CrossRefGoogle Scholar
Clarke, J.; Khorana, A.; Patel, A.; and Rau, R. “Analyst Turnover, Stock Coverage, and Investment Banking Deal Flow.” Working Paper, Purdue Univ. (2004).Google Scholar
Clement, M., and Tse, S. “Financial Analyst Characteristics and Herding Behavior in Forecasting.” Journal of Finance, 60 (2005), 307–341.CrossRefGoogle Scholar
Cliff, M. “Do Independent Analysts Provide Superior Stock Recommendations?” Working Paper, Virginia Polytechnic Institute and State Univ. (2005).Google Scholar
Coval, J., and Shumway, T.. “Do Behavioral Biases Affect Prices?” Journal of Finance, 60 (2005), 1–34.CrossRefGoogle Scholar
Daniel, K.; Hirshleifer, D.; and Subrahmanyam, A. “Investor Psychology and Security Market Underand Overreactions.” Journal of Finance, 53 (1998), 1839–1885.CrossRefGoogle Scholar
Daniel, K., and Titman, S. “Evidence on the Characteristics of Cross-Sectional Variation in Stock Returns.” Journal of Finance, 52 (1997), 1–33.CrossRefGoogle Scholar
Desai, H., and Jain, P. “An Analysis of the Recommendations of the ‘Superstar’ Money Managers at Barron's Annual Roundtable.” Journal of Finance, 50 (1997), 1257–1273.Google Scholar
Dimson, E., and Marsh, P. “An Analysis of Brokers' and Analysts' Unpublished Forecasts of U.K. Stock Returns.” Journal of Finance, 39 (1984), 1257–1292.CrossRefGoogle Scholar
Eames, M.; Glover, S.; and Kennedy, J. “The Association between Trading Recommendations and Broker-Analysts' Earnings Forecasts.” Journal of Accounting Research, 40 (2002), 85–104.CrossRefGoogle Scholar
Easterwood, J., and Nutt, S. “Inefficiency in Analysts' Earnings Forecasts: Systematic Misreaction or Systematic Optimism?” Journal of Finance, 54 (1999), 1777–1797.CrossRefGoogle Scholar
Edwards, W. “Conservatism in Human Information Processing.” In Formal Representation of Human Judgment, Klienmuntz, B., ed. New York, NY: John Wiley and Sons (1968).Google Scholar
Fama, E. “Market Efficiency, Long-Term Returns, and Behavioral Finance.” Journal of Financial Economics, 49 (1998), 283–306.CrossRefGoogle Scholar
Fama, E., and French, K. “Common Risk Factors in Returns on Stocks and Bonds.” Journal of Financial Economics, 33 (1993), 3–56.CrossRefGoogle Scholar
Fama, E., and French, K. “Multifactor Explanations of Asset Pricing Anomalies.” Journal of Finance, 51 (1996), 55–84.Google Scholar
Fox, J. “Employer-Size Wage Gaps: Testing Worker Preference and Span of Control Explanations.” Working Paper, Univ. of Chicago (2004).Google Scholar
Green, C. “The Value of Client Access to Analyst Recommendations.” Journal of Financial and Quantitative Analysis, 41 (2006), 1–24.CrossRefGoogle Scholar
Griffin, D., and Tversky, A. “The Weighing of Evidence and the Determinants of Confidence.” Cognitive Psychology, 24 (1992), 411–435.CrossRefGoogle Scholar
Grundy, B., and Martin, S. “Understanding the Nature of the Risks and the Source of the Rewards to Momentum Investing.” Review of Financial Studies, 14 (2001), 29–78.CrossRefGoogle Scholar
Hong, H., and Kubik, J. “Analyzing the Analysts: Career Concerns and Biased Earnings Forecasts.” Journal of Finance, 58 (2003), 313–351.CrossRefGoogle Scholar
Hong, H.; Kubik, J.; and Solomon, A. “Security Analysts' Career Concerns and Herding of Earnings Forecasts.” Rand Journal of Economics, 321 (2000), 121–144.Google Scholar
Hong, H.; Kubik, J.; and Stein, J. “Social Interaction and Stock-Market Participation.” Journal of Finance, 59 (2004), 137–163.CrossRefGoogle Scholar
Irvine, P. “The Incremental Impact of Analyst Initiation of Coverage.” Journal of Corporate Finance, 9 (2003), 431–451.CrossRefGoogle Scholar
Jegadeesh, N.; Kim, J.; Krische, S.; and Lee, C. “Analyzing the Analysts: When Do Recommendations Add Value?” Journal of Finance, 59 (2004), 1083–1124.CrossRefGoogle Scholar
Jegadeesh, N., and Kim, W. “Value of Analyst Recommendations: International Evidence.” Working Paper, Emory Univ. (2003).Google Scholar
Jones, C., and Lamont, O. “Short-Sale Constraints and Stock Returns.” Journal of Financial Economics, 66 (2002), 207–239.Google Scholar
Lichtenstein, S.; Fischoff, B.; and Phillips, L. “Calibration of Probabilities: The State of the Art to 1980.” In Judgment under Uncertainty: Heuristics and Biases, Kahneman, D., Slovic, P., and Tversky, A., eds. Cambridge, MA: Cambridge Univ. Press (1982).Google Scholar
Lim, T. “Rationality and Analysts' Forecast Bias.” Journal of Finance, 56 (2001), 369–385.CrossRefGoogle Scholar
Loughran, T., and Ritter, J. “Uniformly Least Powerful Tests of Market Efficiency.” Journal of Financial Economics, 55 (2000), 361–389.Google Scholar
Malloy, K. “The Geography of Equity Analysis.” Journal of Finance, 60 (2005), 719–755.CrossRefGoogle Scholar
Metrick, A. “Performance Evaluation with Transactions Data: The Stock Selection of Investment Newsletters.” Journal of Finance, 54 (1999), 1743–1775.CrossRefGoogle Scholar
Michaely, R., and Womack, K. “Conflict of Interest and the Credibility of Underwriter Analyst Recommendations.” Review of Financial Studies, 12 (1999), 653–686.CrossRefGoogle Scholar
Mikhail, M.; Walther, B.; and Willis, R. “Do Security Analysts Improve Their Performance with Experience?” Journal of Accounting Research, 35 (1997), 131–157.CrossRefGoogle Scholar
Mikhail, M.; Walther, B.; and Willis, R. “The Effect of Experience on Security Analyst Underreaction.” Journal of Accounting and Economics, 35 (2003), 101–116.CrossRefGoogle Scholar
Mikhail, M.; Walther, B.; and Willis, R. “Do Security Analysts Exhibit Persistent Differences in Stock Picking Ability?” Journal of Financial Economics, 74 (2004), 67–91.Google Scholar
Mitchell, M.; Pulvino, T.; and Stafford, E. “Limited Arbitrage in Equity Markets.” Journal of Finance, 57 (2002), 551–584.CrossRefGoogle Scholar
Mitchell, M., and Stafford, E. “Managerial Decisions and Long-Term Stock Price Performance.” Journal of Business, 73 (2000), 287–329.CrossRefGoogle Scholar
Odean, T. “Are Investors Reluctant to Realize Their Losses?” Journal of Finance, 53 (1998a), 1775–1798.CrossRefGoogle Scholar
Odean, T. “Volume, Volatility, Price, and Profit when all Traders are Above Average.” Journal of Finance, 53 (1998b), 1887–1934.CrossRefGoogle Scholar
Ofek, E., and Richardson, M. “DotCom Mania: The Rise and Fall of Internet Stock Prices.” Journal of Finance, 58 (2003), 1113–1137.CrossRefGoogle Scholar
Palia, D. “The Impact of Regulation on Manager Labor Markets.” Rand Journal of Economics, 31 (2000), 165–179.Google Scholar
Shleifer, A., and Vishny, R. “The Limits of Arbitrage.” Journal of Finance, 52 (1997), 35–55.CrossRefGoogle Scholar
Stickel, S. “The Anatomy of the Performance of Buy and Sell Recommendations.” Financial Analysts Journal, 51 (1997), 25–39.Google Scholar
Womack, K. “Do Brokerage Analysts' Recommendations Have Investment Value?” Journal of Finance, 51 (1996), 137–167.CrossRefGoogle Scholar