The Cross-Section of Analyst Recommendations

Abstract

We analyze the relation between the price reaction to analysts' revisions and the attributes (years of experience, reputation of the analysts' brokerage houses) of the analysts making the recommendations. These attributes form proxies for analyst ability that we validate by documenting that revisions by high-ability analysts outperform those by low-ability ones. In addition, we find evidence of return persistence following small revisions by high-ability analysts and the opposite return pattern following large revisions of low-ability analysts. These results are consistent with the Griffin and Tversky (1992) argument 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). 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.

Keywords: Analysts, return reactions, stock recommendations

JEL Classification: G12, G14