Abstract
The aim of this paper is to investigate the relationship between narrative sentiment in analysts' company reports and their recommendation and target price outputs. We study an industry-balanced sample of 275 UK quoted company sell-side analyst reports over the period 2006–2010 using a content analysis methodology to measure net sentiment for a range of themes. We then model analysts' outputs against themed sentiment scores to analyse the impact of the Global Financial Crisis. We find that themed sentiments impact upon analysts' outputs, but their magnitude and direction vary over the pre-crisis, crisis and post-crisis periods. In particular, before the crisis we find a strong negative relationship between the macroeconomic and regulatory environment and report outputs, though this effect diminishes somewhat with the onset of the crisis, to be restored thereafter. Growth sentiment exerts a weak positive impact before the crisis which disappears thereafter. Financial performance sentiment becomes a significant positive driver of outputs following the crisis. There is evidently a “back to basics” approach following the crisis which restores financial fundamentals to the heart of stock analysis. Our findings provide some insight into the thought processes of analysts by identifying the dynamic relation between analysts' outputs and themed sentiments.
Highlights
The primary aim of our paper is to investigate the relationship between the narrative sentiment in analysts’ company reports and the recommendation and target price outputs produced by their authors for a given stock
In this paper we examine the relationship between two key analysts’ outputs, target prices and recommendations, and the themes and tonality of the narrative that analysts produce in company stock reports, drawing upon advances in content analysis
In this study we examine the themed sentiment of analyst reports to assess whether there is a link between the sentiment related to the themes and the outputs of analyst reports, and further, whether this relationship strengthens or diminishes in response to changing macroeconomic conditions
Summary
The primary aim of our paper is to investigate the relationship between the narrative sentiment in analysts’ company reports and the recommendation and target price outputs produced by their authors for a given stock. Analysts’ reports are an essential tool in the operation of equity markets, providing an important information channel, increasing information efficiency and the speed at which public information is incorporated into share prices. Such reports bring together a range of equity investment analysis techniques in a structured manner so that the reader, whether an individual investor or a professional fund manager, can make a more informed stock investment decision. In this paper we examine the relationship between two key analysts’ outputs, target prices and recommendations, and the themes and tonality (themed sentiment) of the narrative that analysts produce in company stock reports, drawing upon advances in content analysis. We take into account the possibility that the effect of themed sentiment on analysts’ outputs is contingent upon the state of the wider macroeconomic environment by examining these inputs and outputs before, during and after the Global Financial Crisis
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