Security Analysts and Capital Market Anomalies

90 Pages Posted: 14 Jan 2018 Last revised: 21 Jun 2019

See all articles by Li Guo

Li Guo

Fudan University - School of Economics; Shanghai Institute of International Finance and Economics

Frank Weikai Li

Singapore Management University - Lee Kong Chian School of Business

K.C. John Wei

Hong Kong Polytechnic University

Date Written: July 1, 2018

Abstract

We examine the value and efficiency of analyst recommendations through the lens of capital market anomalies. We find that analysts do not fully use the information in anomaly signals when making recommendations. Specifically, analysts tend to give more favorable consensus recommendations to stocks classified as overvalued, and, more importantly, these stocks subsequently tend to have particularly negative abnormal returns. Analysts whose recommendations are better aligned with anomaly signals are more skilled and elicit stronger recommendation announcement returns. Our findings suggest that analysts’ biased recommendations could be a source of market friction that impedes the efficient correction of mispricing.

Keywords: Analysts; Analyst recommendations; Anomalies; Mispricing; Market efficiency

JEL Classification: G12, G14

Suggested Citation

Guo, Li and Li, Frank Weikai and Wei, Kuo-Chiang (John), Security Analysts and Capital Market Anomalies (July 1, 2018). Journal of Financial Economics (JFE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=3101672 or http://dx.doi.org/10.2139/ssrn.3101672

Li Guo

Fudan University - School of Economics ( email )

600 GuoQuan Road
Shanghai, 200433
China

Shanghai Institute of International Finance and Economics ( email )

777 Guoding Rd
Wu Jiao Chang, Yangpu District
Shanghai, Shanghai 200017
China

Frank Weikai Li (Contact Author)

Singapore Management University - Lee Kong Chian School of Business ( email )

469 Bukit Timah Road
Singapore 912409
Singapore

Kuo-Chiang (John) Wei

Hong Kong Polytechnic University ( email )

11 Yuk Choi Rd
Hung Hom
Hong Kong

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