Abstract
This study uses analyst recommendations and three ambiguity proxies, namely ambiguity in fundamentals, ambiguity in information and market ambiguity, to examine market reaction to recommendation changes in the Taiwanese stock market. The authors find that analysts’ recommendation changes have positive effects on subsequent buy-and-hold abnormal returns when market ambiguity is moderate. When ambiguity in fundamentals is low, recommendation changes have a positive influence on smaller firms. The effect of ambiguity in information on stock returns is associated with market ambiguity; market ambiguity is negatively associated with abnormal returns for firms with moderate ambiguity in fundamentals. Investors in a small firm rely more on analyst recommendations.
Highlights
Mei-Chen Lin, Professor, National Taipei University, Taiwan.Chen-Yang Lin, Graduate student, National Taipei University, Taiwan.Ming-Ti Chiang, Instructor, Hsing Wu University, Taiwan.Investors tend to be ambiguity averse when faced with risk and uncertainty. Keren and Gerritsen (1999) argue that ambiguity aversion is a situation in which decision-makers prefer gambling with a known probability to gambling with uncertainty
Driss (2013) finds that investors have a greater response to analyst recommendation changes, as they perceive a higher level of ambiguity in fundamentals (AIF) or ambiguity in information (AII)
If investors respond to upgrades, the subsequent BHARs are positively related to the direction of the recommendation changes, and β1 > 0
Summary
Mei-Chen Lin, Professor, National Taipei University, Taiwan. Chen-Yang Lin, Graduate student, National Taipei University, Taiwan. Ambiguity aversion could explain the equity premium puzzle (Mehra & Prescott, 1985; Rieger & Wang, 2012), mean variance premium, portfolio inertia and excess volatility of stock prices (Illeditsch, 2011). Driss (2013) finds that investors have a greater response to analyst recommendation changes, as they perceive a higher level of AIF or AII. We use ambiguity in fundamentals (AIF), ambiguity in information (AII) (Driss, 2013) and market ambiguity (the change of VIX) (Williams, 2014) to measure whether different ambiguity proxies affect investors’ decisions after analyst recommendations. The remainder of this paper is organized as follows: section 1 presents the sample, variable definitions and research design, section 2 offers the empirical results; and final section summarizes the results and gives a conclusion
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