Hostname: page-component-586b7cd67f-rcrh6 Total loading time: 0 Render date: 2024-11-26T14:43:25.114Z Has data issue: false hasContentIssue false
  • English
  • Français

The Value of Client Access to Analyst Recommendations

Published online by Cambridge University Press:  06 April 2009

T. Clifton Green
T. Clifton Green
Affiliation:
[email protected], Goizueta Business School, Emory University, 1300 Clifton Rd., Atlanta, GA 30322.
Get access Rights & Permissions [Opens in a new window]

Abstract

Early access to stock recommendations provides brokerage firm clients with incremental investment value. After controlling for transaction costs, purchasing (selling) quickly following upgrades (downgrades) results in average two-day returns of 1.02% (1.50%). Short-term profit opportunities persist for two hours following the pre-market release of new recommendations. The results are robust within sub-periods and a calendar-based strategy produces positive abnormal daily returns of over 10 basis points, or roughly 30% annualized. Recommending firms' market makers shift their quotes accordingly, providing indirect evidence that clients make use of the informational advantage that arises from analysts' opinion changes.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 41 , Issue 1 , March 2006 , pp. 1 - 24
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

Amir, E.; Lev, B.; and Sougiannis, T.. “The Incremental Value of Analysts' Earnings Forecasts in Explaining Stock Returns.” Working Paper, Tel Aviv Univ. (2000).Google 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.; McNichols, M.; and Trueman, B.. “Reassessing the Returns to Analysts' Stock Recommendations.” Financial Analysts Journal, 59 (2003), 88–96.Google Scholar
Barber, B.; Lehavy, R.; McNichols, M.; and Trueman, B.. “Buys, Holds, and Sells: The Distribution of Investment Banks' Stock Ratings and the Implications for the Profitability of Analysts' Recommendations.” Working Paper, UCLA (2004).Google Scholar
Barclay, M. J., and Litzenberger, R. H.. “Announcement Effects of New Equity Issues and the Use of Intraday Price Data.” Journal of Financial Economics, 21 (1988), 71–99.Google Scholar
Boni, L., and Womack, K. L.. “Analysts, Industries, and Price Momentum.” Journal of Financial and Quantitative Analysis, 41 (2006), 85–109.Google Scholar
Busse, J. A., and Green, T. C.. “Market Efficiency in Real Time.” Journal of Financial Economics, 65 (2002), 415–437.CrossRefGoogle Scholar
Chan, L. K. C., and Lakonishok, J.. “Institutional Equity Trading Costs: NYSE versus Nasdaq.” Journal of Finance, 52 (1997), 713–735.Google Scholar
Conrad, J.; Cornell, B.; Landsman, W. R.; and Rountree, B. R.. “How Do Analyst Recommendations Respond to Major News?” Journal of Financial and Quantitative Analysis, 41 (2006), 25–49.CrossRefGoogle Scholar
Conrad, J.; Johnson, K. M.; and Wahal, S.. “Institutional Trading and Alternative Trading Systems.” Journal of Financial Economics, 70 (2003), 99–134.CrossRefGoogle Scholar
Cowles, A. “Can Stock Market Forecasters Predict?“ Econometrica, 1 (1933), 309–324.CrossRefGoogle Scholar
Ellis, K.; Michaely, R.; and O'Hara, M.. “The Accuracy of Trade Classification Rules: Evidence from Nasdaq.” Journal of Financial and Quantitative Analysis, 35 (2000), 529–551.CrossRefGoogle Scholar
Fama, E. F., and French, K. R.. “Common Risk Factors in the Returns on Stocks and Bonds.” Journal of Financial Economics, 33 (1993), 3–56.CrossRefGoogle Scholar
Grossman, S. J., and Stiglitz, J. E.. “On the Impossibility of Informationally Efficient Markets.” American Economic Review, 70 (1980), 393–408.Google Scholar
Heidle, H. G., and Li, X.. “Is There Evidence of Front-Running before Analyst Recommendations? An Analysis of the Quoting Behavior of Nasdaq Market Makers.” Working Paper, Notre Dame Univ. (2003).Google Scholar
Huang, R. D. “The Quality of ECN and Nasdaq Market Maker Quotes.” Journal of Finance, 57 (2002), 1285–1319.CrossRefGoogle Scholar
Irvine, P. “Analysts' Forecasts and Brokerage-Firm Trading.“ Accounting Review, 79 (2004), 125–149.Google Scholar
Ivkovich, Z., and Jegadeesh, N.. “The Timing and Value of Forecast and Recommendation Revisions.” Journal of Financial Economics, 73 (2004), 433–463.CrossRefGoogle Scholar
Jegadeesh, N., and Kim, W.. “Value of Analyst Recommendations: International Evidence.” Working Paper, Emory Univ. (2004).Google Scholar
Jegadeesh, N.; Kim, J.; Krische, S. D.; and Lee, C. M. C.. “Analyzing the Analysts: When Do Recommendations Add Value?” Journal of Finance, 59 (2004), 1083–1124.Google Scholar
Juergens, J. “How Do Stock Markets Process Analysts' Recommendations? An Intra-Daily Analysis.” Working Paper, Arizona State Univ. (2000).Google Scholar
Keim, D., and Madhavan, A.. “Transaction Costs and Investment Style: An Inter-Exchange Analysis of Institutional Equity Trades.” Journal of Financial Economics, 46 (1997), 265–292.Google Scholar
Kim, S. T.; Lin, J. C.; and Slovin, M. B. “Market Structure, Informed Trading, and Analysts' Recommendations.” Journal of Financial and Quantitative Analysis, 32 (1997), 507–524.CrossRefGoogle Scholar
Lee, C. M. C., and Ready, M. A.. “Inferring Trade Directions from Intraday Data.” Journal of Finance, 46 (1991), 733–746.Google Scholar
Lin, H., and McNichols, M. F.. “Underwriting Relationships, Analysts' Earnings Forecasts and Investment Recommendations.” Journal of Accounting and Economics, 25 (1998), 101–127.Google Scholar
Loughran, T., and Ritter, J. R.. “Uniformly Least Powerful Tests of Market Efficiency.” Journal of Finance Economics, 55 (2000), 361–389.Google Scholar
Michaely, R., and Womack, K. L.. “Conflict of Interest and the Creditability of Underwriter Analyst Recommendations.” Review of Financial Studies, 12 (1999), 653–686.Google Scholar
Mitchell, M. L., and Stafford, E.. “Managerial Decisions and Long-Term Stock Price Performance.” Journal of Business, 73 (2000), 287–329.Google Scholar
Peterson, M., and Sirri, E.. “Evaluation of the Biases in Execution Cost Estimation Using Trade and Quote Data.” Journal of Financial Markets, 6 (2003), 259–280.CrossRefGoogle Scholar
Schwartz, R. A., and Steil, B.. “Controlling Institutional Trading Costs: We Have Met the Enemy, and It Is Us.” Journal of Portfolio Management, 28 (2002), 39–49.CrossRefGoogle Scholar
Smith, J. W. “The Role of Quotes in Attracting Orders on the Nasdaq Interdealer Market.” Working Paper, Nasdaq Economic Research (2000).Google Scholar
Stickel, S. “Reputation and Performance among Security Analysts.” Journal of Finance, 47 (1992), 1811–1836.Google Scholar
Womack, K. L. “Do Brokerage Analysts' Recommendations Have Investment Value?” Journal of Finance, 51 (1996), 137–167.CrossRefGoogle Scholar