Analyst Recommendations Research Articles

How informative are insider trades and analyst recommendations?

This study evaluates the interactions between, and informativeness of, insider trading and analyst recommendations. We find that analyst recommendations significantly affect subsequent insider trading, but not vice versa. Surprisingly, in aggregate, insiders buy more shares following analyst downgrades and sell more shares following upgrades. This pattern persists even after controlling for analysts’ momentum and insiders’ contrarian trading preferences. Analysts, in contrast, do not systematically take into account insider trading when revising their recommendations. More importantly, we show that these two information signals complement each other although insider buying could be a singularly strong signal that substitutes the informativeness of analyst recommendations under certain circumstances. Overall, our findings highlight the important dynamics and financial market consequences between the two crucial groups of information providers.

Analyst coverage and the idiosyncratic skewness effect in the Taiwan stock market

In this study, we investigate the effect of analyst coverage on the idiosyncratic skewness (IS) anomaly. We adopt the ordinary least square method with the corresponding standard errors that are heteroskedasticity consistent and clustered by firm. Our results show that the IS anomaly exists in the Taiwanese stock market, and analyst coverage mitigates it. Moreover, we use one exogenous shock on analysts due to the mergers and closures of brokerages to address the endogenous concern, and to confirm that analyst coverage reduces the IS anomaly. Specifically, the buy and upgrade recommendations of analysts mitigate the negative IS spreads, but their sell and downgrade recommendations aggravate those spreads. Further, we use a quasi-natural experiment on short-sale constraints in the Taiwanese stock market and find that the effects of analysts' recommendations on the negative IS spreads are not subsumed by those constraints.

Going beyond optimal distinctiveness: Strategic positioning for gaining an audience composition premium

AbstractResearch SummaryA core question in strategy research is how firms should position themselves to gain favorable audience evaluations. Emphasizing the heterogeneity in audience predispositions, we propose that firms can gain an audience composition premium by strategically positioning themselves to gain more (less) attention from audiences with positive (negative) predispositions toward them. We argue that this approach to strategic positioning is more conducive for firms with high dispersion in their audience predispositions and that firms can increase their ability to gain an audience composition premium by engaging with audiences holding moderately diverse evaluative schemas. We employ recommender systems and topic modeling to analyze 152,312 firm‐analyst‐year observations from 1997 to 2018 and 297,931 earnings call transcripts of U.S. public firms and find strong support for our predictions.Managerial SummaryA key question managers encounter is how to increase their firms' evaluations from external evaluators such as security analysts. In this study, we show that firms can increase their aggregate analyst recommendations by influencing the composition of analysts who opt to cover them and gaining evaluations from analysts who have more favorable predispositions toward them (i.e., by gaining an audience composition premium). Our findings also suggest that gaining an audience composition premium is more important for enhancing a firm's aggregate analyst recommendations when there is a higher dispersion in analyst predispositions toward the firm. To increase its ability to gain an audience composition premium, the firm should engage with analysts who exhibit a moderate degree of heterogeneity in their evaluative schemas.

Transition from brown to green: Analyst optimism, investor discount, and Paris Agreement

This paper studies financial analysts' evaluation of brown (fossil fuel) versus green (renewable) energy stocks. We find that, compared to green energy stocks, analysts tend to issue more Buy and fewer Sell recommendations for brown energy stocks. Such optimism for brown energy stocks is reduced after the commencement of groundwork for the Paris Agreement. This is especially so for coal stocks than for oil and gas stocks. We also find that, compared to recommendations on green energy stocks, those on brown energy stocks receive a lower reaction from investors, suggesting an investor discount on the informativeness of analyst recommendations on brown energy stocks. Further analysis indicates that in recent years such informational discount has diminished and investors' reliance on analysts' opinions about brown and green energy stocks has converged. Our paper discusses possible reasons for the observed differences and changes in evaluating brown vis-à-vis green energy stocks.

Do employees' views matter in corporate governance? The relationship between employee approval and CEO dismissal

AbstractResearch SummaryAs important stakeholders of a firm, employees are critical to firm success because they are directly engaged in strategy implementation. Accordingly, we theorize that employees' views can impact assessment of the CEO by the board of directors beyond firm financial performance and security analysts' recommendations. Specifically, we hypothesize that employee approval of a CEO's leadership is predictive of the board's CEO dismissal decision, particularly when there is relatively higher firm financial performance, more positive security analyst recommendations, and lower CEO power. Using longitudinal data from 338 firms and 1,252 firm‐year observations between 2010 and 2018, we found empirical support for the above predictions. Our theory and supportive findings have important implications for research and practice regarding employee engagement, strategic leadership, and corporate governance.Managerial SummaryBecause employees are important stakeholders of a firm and critical to its success, we argue that their views about the CEO can impact how the board of directors evaluates the CEO beyond firm financial performance and security analysts' recommendations. Our results show that higher employee approval of CEO leadership (measured by data collected from Glassdoor.com over multiple years) negatively predicts CEO dismissal, particularly when the firm performs better financially, gets more positive recommendations from security analysts, and the CEO has less power relative to the board. These findings suggest that employees' views do matter in the retention or dismissal of the CEO, and that CEOs should be mindful of how their employees view their leadership and the strategies they are promoting at their firms.

The heterogeneous impact of industry concentration on analyst performance

We examine the impact that industry concentration has on superior and inferior analysts' performance by utilizing a Herfindahl-Hirschman index of analyst specialization. Using broker M&As as a plausibly exogenous shock to analyst workloads, we find that superior analysts' forecast accuracy improves when their coverage is more concentrated within a few industries. However, there is no evidence of an equivalent improvement for inferior analysts. We argue that this is due to superior analysts having a comparative advantage in utilizing intra-industry relevant information and, therefore, the more concentrated their portfolio, the better they can extract this type of information for pricing stocks. We also find that investors who trade according to the buy-sell recommendations of superior analysts who have recently experienced increased industry concentration can gain extra returns on their stock portfolio.

CEO Regulatory Focus, Earnings Management, and Analyst Recommendations

Drawing on regulatory focus theory and impression management literature, we examine the influences of CEO regulatory focus on earnings management. Furthermore, we show how the analyst recommendations differentially moderate the relationship between CEO promotion and prevention foci and earnings management. Based on U.S. public firms from 2003 to 2019, our findings indicate that CEO promotion focus is positively related to the magnitude of income-increasing earnings management, and CEO prevention focus is negatively related to the magnitude of income-increasing earnings management. In the context of positive analyst recommendations, the positive relationship between CEO promotion focus and income-increasing earnings management is strengthened, and the negative relationship between CEO prevention focus and income-increasing earnings management is weakened.

To Highlight or Not to Highlight: Costs of Environmental Sustainability

With the popularity of corporate environmental sustainability, management scholars have started to call attention to the cost of sustainability pursuit. While corporate sustainability brings about many benefits, implementation is costly. Most firms do not report environmental costs separately from other costs, but some firms do. We explore what drives firms to report environmental costs and how such reporting affects external evaluations such as analyst recommendations. We suggest and find that firms are more likely to reveal environmental costs separately for the purpose of highlighting the costs associated with their sustainability pursuit when faced with conflicting pressure from shareholders for sustainability. We further find that firms that report environmental costs separately generally receive less favorable analyst recommendations and forecasts than those who do not. This effect is mitigated by a greater share ownership from short-term institutional investors.

How Incongruence Between Managers’ Tone of Voice and Word Sentiment Influences Security Analysts

Maintaining favorable analyst recommendations is important to organizations and their management, as these recommendations provide stakeholders with expert opinions about organizations’ well-being. Hence, there is a strong impetus for managers to prevent analysts downgrading their organization. In verbal communication, such as in earnings calls, managers not only try to influence analysts via the words that they use, but also via the tone in which they speak (i.e., paraverbal communication). Paraverbal communication is both an extra channel of information for analysts, and a strategic tool managers may use to exert influence. On the one hand, management wants to signal trustworthiness through congruency in their communication, but on the other hand is inclined to offset negative information by speaking positively, or downplay expectations by using a negative tone when discussing positive information. Leveraging several state-of-the-art Natural Language Processing algorithms, using earnings calls’ audio and textual data, we analyze the incongruence in managers’ communication. We find that paraverbal communication affects analysts’ recommendations and show which paraverbal strategies characterize organizations that are least likely to get downgraded. Our study therefore contributes to the literature on corporate communication, demonstrating the importance of verbal tone in managing the relationship with market intermediaries (analysts). Furthermore, this is one of the first studies in management that utilizes audio data quantitatively.

A Straw in The Wind: Media Opinion on the Family and Analyst Responses During Family Firm Succession

This study explores how business media opinion on family members affect analyst stock recommendations during family firms’ intergenerational successions. Through field interviews and data analyses on a sample of Chinese publicly listed family firms, we find evidence suggesting that analysts tend to view the process from a system perspective and employ contextually embedded and relational specific cognitive schemas when understanding the performance implications of family dynamics. Our results show that positive media opinion on successors can increase analyst recommendations, but such effects may be attenuated by favorable media opinion about founders. This founders’ shadow effect is less pronounced among father-daughter and founder-nonblood heirs than it is for father-son dyads. Moreover, favorable media opinion about successors siblings may increase analysts’ worry about sibling rivalry and thus leads to lower recommendations. We discussed the theoretical and practical implications of our study to the institutional logics, securities analysts, and family firm literature.

Does online investor sentiment explain analyst recommendation changes? Evidence from an emerging market

PurposeThe authors examine how financial analysts respond to online investor sentiment when updating recommendations for specific stocks in South Africa. The aim is to establish whether online sentiment contains significant information that can influence analyst recommendations. The authors follow up the above by examining when online investor sentiment is most associated with analyst recommendation changes.Design/methodology/approachFor online investor sentiment proxies, the authors make use of the social media sentiment and news media sentiment scores provided by Bloomberg Inc. The sample size includes all companies listed on the Johannesburg Stock Exchange All Share Index. The study uses traditional ordinary least squares to examine the relation at the mean and quantile regression to identify the scope of the relationship across the distribution of the dependent variable.FindingsThe authors find evidence that pre-event news sentiment significantly influences analyst recommendation changes while no significant relationship is found with the Twitter sentiment. Further analysis shows that news sentiment is more influential when the recommendation changes are moderate (in the middle of the conditional distribution of the recommendation changes).Originality/valueThe study is the one of the first to examine the association between online sentiment and analyst recommendation changes in an emerging market using high frequency data. The authors also make a direct comparison between social media sentiment and news media sentiment, some of the most used contemporary investor sentiment proxies.

The Value of the Capital Market Development-Bursa Research Scheme's (CBRS) Recommendation Changes in

This study analyses the changes in analyst recommendations in the Malaysian stock market from 2010 to 2018. Using samples of 668 upgrade recommendations and 495 downgrade recommendations, this study employs event study methodology to examine price performance by predicting abnormal returns using the market model. The findings indicate that significant positive stock price reactions occur following upgrade recommendations and significant negative stock price reactions occur following downgrade recommendations over a short-term and up to six-month period. Further analysis reveals no statistically significant difference in performance between analysts who are participants of the Capital Market Development Fund – Bursa Research Scheme (CBRS) and those who are not. This finding implies that, despite the significant market reaction to both upgrade and downgrade recommendations, CBRS’s financial analysts do not provide better analysis than those of non-CBRS analysts.

Google searches around analyst recommendation revision announcements: Evidence from the Taiwan stock market

We investigate the impact of Google search volume on stock prices and trading volume around recommendation revision announcements made by securities firms in the Taiwan stock market. Our results reveal that for upgrade announcements, the internet searches that are driven by investor attention lead to a temporary increase in positive price pressure around the revision announcements, whereas the price effect of the information extracted from the Google searches is persistent. We also find that trading volume reflects the incoming news around the revision announcements. Our results suggest that individual investors, who receive analyst revision reports gratis from securities firms before these reports are made public, will search through the Internet to obtain valid firm-specific information relating to the recommendation revisions.

Analyst target price revisions and institutional herding

We document that institutional herding behavior is associated with analyst target price revisions even after controlling for the effects of analyst recommendations and earnings forecasts, and provide insights into the price impact of institutional herding. Institutional investors tend to buy the same stocks following an upward target price revision and sell the same stocks following a downward price revision. Moreover, institutional investors tend to overreact to analysts' target price revisions, which exacerbates the mispricing in the stock market. Such price destabilizing effect is particularly pronounced for herding among investment firms.

Does environmental underperformance duration affect firms' green innovation? Evidence from China

AbstractDoes the length of a firm's environmental underperformance shape its green innovation? Drawing on the behavioral theory of the firm, we argue that the duration of a firm's environmental underperformance plays an important role in shaping its green innovation activities. Using the data from Chinese publicly listed firms spanning from 2010 to 2018, we find that the duration of environmental underperformance has a U‐shaped effect on a firm's green innovation, possibly due to competing short‐ and long‐term solutions to regain legitimacy. We also find that this relationship is moderated by environmental underperformance intensity and analyst recommendation pressure. Our study contributes to the literature on green innovation and the behavioral theory of the firm. We discuss the implications for policymakers and managers.

Humble Behaviorism Redux

The need to bring behavior analysis to scale is no more obvious or urgent than now. Collaboration between behavior analysts and healthcare workers, educators, policymakers, mental health clinicians, social workers, and so many other professionals is critical to reaching under-resourced and traditionally marginalized populations. First, however, interprofessional collaboration must be adopted widely and reinforced within the behavior analytic community. Disciplinary centrism and hubris pose barriers to effective interprofessional collaboration, leading one to assume the position that practitioners of the same discipline are better trained and smarter than those of a different field. However, cultural humility (Wright, Behavior Analysis in Practice, 12(4), 805–809, 2019) is an alternative to disciplinary centrism that allows professionals to retain identities born of cultural histories and training (Pecukonis, Journal of Teaching in Social Work, 40(3), 211–220, 2020). Furthermore, cultural reciprocity is a process of self-observation and collaborative inquiry that involves questioning one’s own assumptions and forces individuals (and professions) to confront the contradictions between their values and their practices (Kalyanpur & Harry, 1999). In this paper, we revisit the call for Humble Behaviorism first made by Alan Neuringer in 1991 and the recommendations of fellow behavior analysts since. Specifically, we introduce a framework of cultural reciprocity to guide humble behaviorists as they acquire behaviors necessary to establish and maintain productive interprofessional relationships. We encourage them to act on their ethical and moral duties to address social problems of global concern and bring behavior analysis to scale.

Analyst Recommendations: Evidence on Hedge Fund Activism and Managerial Ability

This study investigates analysts’ attitudes toward the cooperation/conflict between hedge fund activists and target firm management by examining the impact of managerial ability on analyst recommendations around hedge fund activism. We find that analysts are more likely to reiterate recommendations and less likely to downgrade recommendations for target firms with high managerial skills following the arrival of hedge fund activists. This may be because analysts recognize advantages associated with target firm management’s superior ability that enables managers to avoid costly fights with hedge fund activists. We also show that stronger managerial ability is associated with the higher analyst forecast accuracy during hedge fund intervention. Our results are robust to a cross-sectional analysis of recommendation changes after activists’ takeover. Collectively, our evidence supports the positive impact of managerial ability on analysts’ opinions within the context of hedge fund activist campaigns and sheds light on the information gathering and processing ability of financial analysts.

Legislative gridlock and stock return dispersion around roll-call votes

This study examines whether and how legislative gridlock in Congress affects legislative uncertainty. Results show that legislative gridlock increases cross-sectional dispersion in returns on individual stocks and portfolios over short windows around roll-call votes on Congressional bills. The effect of gridlock is beyond political polarization, Presidential ideology, unified versus divided governments, economic recession, policy uncertainty (Baker et al., 2016), and macroeconomic uncertainty (Jurado et al., 2015). Greater legislative uncertainty is associated with higher bond yield and lower likelihood of seasoned equity offerings and analyst recommendations. The effect of gridlock depends on industry and firm characteristics, as well as political polarization and Presidential ideology. Overall, legislative gridlock increases legislative uncertainty as reflected in cross-sectional dispersion in stock returns.

Analyst Recommendations and Mutual Fund Voting: Evidence from Shareholder-Sponsored Corporate Governance Proposals

Analyst Recommendations and Mutual Fund Voting: Evidence from Shareholder-Sponsored Corporate Governance Proposals

Return prediction or investor manipulation? Recommendations of non-professional analysts and stock price movement

Return prediction or investor manipulation? Recommendations of non-professional analysts and stock price movement