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
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
