Never Judge a Book by Its Cover - What Security Analysts Have to Say Beyond Recommendations

Abstract

Our study analyzes the market reaction to the complete content of a large sample of analysts' reports in the period from 2002 to 2004 for the German market. In particular, we explore whether the three summary measures in the reports, i.e., recommendation revisions, earnings forecast revisions, and target price forecast revisions are acknowledged by the market. Additionally, we investigate if the given justifications in the written text of analysts' reports contain information value beyond the three summary measures. We find that earnings forecast revisions and target price forecast revisions contain valuable information, both unconditional and conditional on the remaining information in the report. Recommendation revisions, however, do provide little independent information. Our findings also reveal that the justifications given by the analysts are highly acknowledged by market participants. These justifications provide valuable information, both unconditional and conditional on all other types of information in a report. With respect to the current discussion about potential conflicts of interests of affiliated analysts, our findings suggest that business ties between banks and the analyzed companies do not affect the market reaction to the dissemination of an analysts' report, systematically. Finally, we find the summary measures and the given justifications in the written text to have a much more pronounced impact on the market reaction for reports issued by banks with a particularly high reputation in the industry compared to other banks.