Strong Buy Research Articles

To buy or not to buy? The value of contradictory analyst signals

We study the predictive ability of individual analyst target price changes for post-event abnormal stock returns within each recommendation category. Although prior studies generally demonstrate the investment value of target prices, we find that target price changes do not cause abnormal returns within each recommendation level. Instead, contradictory analyst signals (e.g., strong buy reiterations with large target price decreases) neutralize each other, whereas confirmatory signals reinforce each other. Further, our analysis reveals that large target price downgrades can be explained by preceding stock price decreases. However, upgrades are not preceded by stock price increases, thereby demonstrating asymmetric analyst behavior when adjusting target prices to stock prices. Our results suggest that investors should treat recommendations with caution when they are issued with large contradictory target price changes. Thus, instead of blindly following a recommendation, investors might put more weight on the change in the corresponding target price and consider transaction costs.

Monitors or Predators: The Influence of Institutional Investors on Sell-Side Analysts

ABSTRACT: Regulators and the investment community have been concerned that institutional investors pressure financial analysts through trading commission fees to issue optimistic opinions in support of their stock positions. We use a unique dataset that identifies mutual fund companies' allocation of trading commission fees to individual brokerages and provide direct evidence on this issue. In particular, we show that for stocks in which the fund companies have taken large positions, analysts are more optimistic in their stock recommendations when their brokerages receive trading commission fees from these fund companies. The relationship is stronger when the commission fee pressure is greater. The market reacts less favorably to the “Strong Buy” recommendations of analysts facing greater commission fee pressure. The funds also respond negatively to such recommendations in making portfolio adjustments. These results point to a source of analyst bias that has been little explored in the literature. Data Availability: The data are publically available from the sources identified in the paper.

Monitors or Predators: The Influence of Institutional Investors on Sell-side Analysts

Regulators and the investment community have been concerned that institutional investors pressure financial analysts through trading commission fees to issue optimistic opinions in support of their stock positions. We use a unique dataset that identifies mutual fund companies’ allocation of trading commission fees to individual brokerages and provide direct evidence on this issue. In particular, we show that for stocks that the fund companies have taken large positions in, analysts are more optimistic in their stock recommendations when their brokerages receive trading commission fees from these fund companies. The relationship is stronger when the commission fee pressure is greater. The market reacts less favorably to the “Strong Buy” recommendations of analysts facing greater commission fee pressure. The funds also respond negatively to such recommendations in making portfolio adjustments. These results point to a source of analyst bias that has been little explored in the literature.

To Buy or Not to Buy? The Value of Contradictory Analyst Signals

We study the predictive ability of individual analyst target price changes for post-event abnormal stock returns within each recommendation category. Although prior studies generally demonstrate the investment value of target prices, we find that target price changes do not cause abnormal returns within each recommendation level. Instead, contradictory analyst signals (e.g., strong buy reiterations with large target price decreases) neutralize each other, whereas confirmatory signals reinforce each other. Further, our analysis reveals that large target price downgrades can be explained by preceding stock price decreases. However, upgrades are not preceded by stock price increases, thereby demonstrating an asymmetric analyst behavior when adjusting target prices to stock prices. Our results suggest that investors should treat recommendations with caution when they are issued with large contradictory target price changes. Thus, instead of blindly following a recommendation, investors might put more weight on the change in the corresponding target price and consider transaction costs.

Stock Performance after Securities Analyst's Rating Downgrades

Securities analysts disclose their opinion on stocks and write reports indicating how they believe the target firm will perform against the market index. Many brokerage firms issue ratings based on five scales, namely, ``strong buy'', ``buy'', ``neutral'', ``sell'' and ``strong sell''. Empirically, it is known that firms downgraded from `strong buy' to `buy' lose value regardless of the fact that the analyst's signal is still positive. We investigate characteristics of firms that lose large market value in the post-downgrade period. Using data-mining approach, we found higher pre-downgrade volatility is strongly associated with the negative return in the post-downgrade period. Among high volatility firms, small capitalization stocks and stocks with inferior sentiment are particularly vulnerable to such downgrades. The result is consistent with the hypothesis in the field of Finance, i.e. the higher the disagreement level among investors in the market more overvalued the stock remains.

Early Career Experience, Analyst Optimism, and Skills

This study examines whether individuals' early-career experience influences their subsequent job behavior. I find that sell-side analysts who worked with more optimistic coworkers in their early career issue more strong buy recommendations, more large upgrades, higher earnings forecasts, and higher price targets. Various tests — exploiting the ex post characteristics of early-career experience based on job span and newcomers, using instruments based on the gender composition and network size of early-career coworkers, and implementing a series of falsification and robustness tests — consistently suggest that these systematic patterns are driven by analysts' early-career coworker experience rather than by their self-selection.

Why are recommendations optimistic? Evidence from analysts’ coverage initiations

We examine the long-term stock performance of analyst recommendations and the properties of accompanied earnings forecasts for initiations and non-initiations to evaluate the reporting, selection, and processing explanations for analyst optimism. We find that Strong Buy and, to a lesser degree, Buy initiation recommendations underperform their non-initiation counterparts after controlling for analyst, brokerage, and firm characteristics associated with the initiation decision and expected long-term stock returns. Yet, earnings forecasts accompanying Strong Buy and Buy initiation recommendations are less optimistic and more accurate than those accompanying non-initiation recommendations. Our findings suggest that conflicts of interest (that is, the reporting explanation) are the dominant source for favorable recommendations.

국내 패션 멀티브랜드 스토어의 유형별 전략 및 발전방향

This study presents the strategic directions for Korean multi-brand fashion stores by running in-depth industry research and market analysis. Over 20 professionals were selected from Korean multi-brand fashion stores for this study and in-depth interviews were conducted to evaluate related subjects. The results of the study were as follows. First, Korean multi-brand fashion stores could be classified into three criteria: operating ownership, merchandise mix, and store identity. Second, operating ownership criterion was chosen for further investigations of strategies and directions of the multi-brand fashion stores. The operating ownership criterion consists of three types; department store types, specialty store types, and boutique types. Each type deploys different buying practice, organizational strategies, and distribution channels. Lastly, the suggested strategic directions for each type are summarized as follows. The `department store type` should utilize its strong direct buying capabilities and acquisition of merchandising can be more effectively managed. The store should utilize its strong buying power as a tool to develop new private brands (PBs). For `specialty store type`, two key factors have been derived: market share expansion and positioning themselves to become a new distribution channel. To respond to these factors, the store needs to be perceived as a brand then diversify its business. Strengthening its brand will allow it to expand into a new distribution channel and also enable a strategic partnership with its competitor brands. The factors influencing `boutique type` is personalization and uniqueness. With an emphasis on the uniqueness of products and merchandising it will be able to implement the role as a personal shopper and stylist to provide a very personalized service to its customers.

Hedge Funds and Analyst Optimism

This study explores the relationship between hedge fund equity holdings and sell-side analyst recommendations. In line with anecdotal evidence which suggests that sell-side analysts are now under tremendous pressure to generate brokerage commissions from their lucrative hedge fund clients, we show that sell-side analysts tend to issue buy and strong buy recommendations on stocks predominantly held by hedge funds. These stocks do not deserve the flattering reports lavished by analysts. Relative to other buy and strong buy recommendations, these favorable recommendations parlay into poorer three-month and six-month stock returns going forward. Hedge funds take advantage of the flattering reports by concurrently offloading their stock holdings. We obtain similar conclusions with analyst upgrades and downgrades, relative recommendations, and 12-month price targets. The findings are robust to adjustments for analyst stock coverage, and are stronger for seasoned analysts, indicating that analysts are not simply incorporating information embedded in hedge fund holdings. Consistent with the notion that analysts are driven by brokerage commissions, analysts are more likely to craft optimistic reports for stocks held by high dollar turnover hedge funds than for stocks held by other less important hedge fund clients. Finally, hedge funds ameliorate the reputation cost of a buoyant recommendation by voting biased analysts as all-stars. Our results suggest that in a post Spitzer-era, Wall Street research departments, having been forcibly weaned off investment banking revenues, now contend with new hedge fund-induced conflicts of interests.

Ratings Changes, Ratings Levels, and the Predictive Value of Analysts’ Recommendations

We show that abnormal returns to analysts’ recommendations stem from both the ratings levels assigned and the changes in those ratings. Conditional on the ratings change, buy and strong buy recommendations have greater returns than do holds, sells, and strong sells. Conditional on the ratings level, upgrades earn the highest returns and downgrades the lowest. We also find that both ratings levels and changes predict future unexpected earnings and the associated market reaction. Our results imply that 1) investment returns may be enhanced by conditioning on both recommendation levels and changes; 2) the predictive power of analysts’ recommendations reflects, at least partially, analysts’ ability to generate valuable private information; and 3) some inconsistency exists between analysts’ ratings and the formal ratings definitions issued by securities firms.

Reputation Acquisition of Underwriter Analysts — Theory and Evidence

I examine the role of reputation in a multi-stage strategic information transmission game between an analyst and an investor. While reputation mitigates the conflict of interest in a repeated game, it may induce the biased analyst to elevate potential underperformers to the highest rating category, thus undermining the information quality of the highest message. Uncertainty about firm value helps the unbiased analyst to communicate better information in a single stage game. However, in a multi-stage game, uncertainty increases misrepresentation by the biased analyst. Empirical implications are tested. I document that 1) affiliated and unaffiliated analysts recommendations differ only in the “Strong Buy” category; 2) the underperformance of underwriter analysts' recommendations increases with the underlying uncertainty.

Affiliated mutual funds and analyst optimism

This paper extends the literature on analyst optimism. Our analysis of a large sample of recommendations issued from 1995 through 2006 indicates that sell-side analysts are likely to assign frequent and favorable ratings to a stock after the analysts’ affiliated mutual funds invest in that stock. Controlling for a number of variables, including the ties between analysts and investment banks, we find that the greater the portfolio weight of a stock in the fund family, the more optimistic the stock ratings from affiliated analysts become. Since 2002, analysts’ optimism on stocks held by affiliated mutual funds has declined. However, an analyst's decision of upgrading a stock to a “strong buy” rating is still significantly associated with the portfolio weight of that stock in the fund family.

Institutional Investors, Commission Fees, and Analyst Bias

Anecdotal evidence suggests that institutional investors pressure financial analysts through trading commissions to issue biased opinions in support of their stock positions. We use a unique dataset that identifies mutual fund companies' allocation of commission fees to individual brokers and provide direct evidence in this regard. In particular, we show that analysts are more optimistically biased in their stock recommendations and earnings forecasts for stocks that the mutual funds have taken large positions in when the analysts' brokers receive commission fees from the fund management companies. The relationship is stronger when the commission fee pressure is greater. The market reacts less favorably to strong buy recommendations of analysts facing greater commission fee pressure. The funds also respond negatively to such recommendations in making portfolio adjustments.

Paying for Coverage: Conflict of Interest Among Company-Sponsored Research Firms

The Securities and Exchange Commission has recommended company-sponsored research to address the need for greater analyst following of smaller companies. Anecdotal evidence suggests company-sponsored research is more optimistic than research from traditional brokerage firms (Kalra 2004; Lee and Metaxas 2004; Richardson 2006). Using a sample of companies with both company-sponsored analysts and traditional analysts, I find that analysts at company-sponsored research firms are more likely to issue positive recommendations than analysts at traditional brokerage firms. Further, while the market reacts to recommendation announcements of traditional analysts, I fail to find a significant market reaction to recommendation announcements of company-sponsored analysts. Interestingly, however, I find significant positive (negative) post-announcement abnormal returns following Strong Buy (Sell) recommendation announcements of company-sponsored analysts. Similar results are observed following traditional analyst Strong Buy recommendations, but I do not find significant negative abnormal returns following their Sell recommendations. These results suggest that the market fails to fully appreciate the information contained in the announcement of company-sponsored and traditional analysts' Strong Buy recommendations, while uniquely failing to appreciate the information contained in company-sponsored analyst Sell recommendations.

The value of stock analysts' recommendations: Evidence from emerging markets

This is the first study to empirically examine post-recommendation buy and hold abnormal returns in emerging markets. By analyzing a sample of 13 emerging countries over the decade from 1996 to 2005, we find that stock prices react strongly to stock analyst recommendations and revisions. We also find that there is a stronger positive bias in analyst recommendations and revisions in emerging markets compared with that in developed markets. In our cross-sectional analysis, we find that the Market-to-Book ratio is the primary indicator for Buy and Strong Buy recommendation regressions. This indicates that stock analysts in emerging markets prefer high growth stocks with attractive characteristics.

Analyst Incentives and the Financial Characteristics of Wall Street Darlings and Dogs

Wall Street darlings, stocks with consensus strong buy recommendations, tend to be stocks with recent positive EPS momentum and surprise, recent positive relative price momentum, and recent positive EPS forecast revisions. Darlings also have stronger balance sheets, in the sense of lower debt, and tend to have lower dividend yields. Finally, darlings also tend to have higher long-term EPS growth forecasts and lower book-to-market ratios. Wall Street dogs, stocks with consensus hold and sell recommendations, tend to have the opposite characteristics. <b>TOPICS:</b>Equity portfolio management, security analysis and valuation, portfolio construction

Why are Recommendations Optimistic? Evidence from Analysts’ Coverage Initiations

We examine the long-term stock performance of analyst recommendations and the properties of accompanied earnings forecasts for initiations and non-initiations to evaluate the reporting, selection, and processing explanations for analyst optimism. We find that Strong Buy and, to a lesser degree, Buy initiation recommendations under-perform their non-initiation counterparts after controlling for analyst, brokerage and firm characteristics associated with the initiation decision and expected long-term stock returns. Yet, earnings forecasts accompanying Strong Buy and Buy initiation recommendations are less optimistic and more accurate than those accompanying non-initiation recommendations. Our findings suggest that conflicts of interest (i.e., the reporting explanation) are the dominant source for favorable recommendations.

Are small investors naive about incentives?

Security analysts tend to bias stock recommendations upward, particularly if they are affiliated with the underwriter. We analyze how investors account for such distortions. Using the NYSE Trades and Quotations database, we find that large traders adjust their trading response downward. While they exert buy pressure following strong buy recommendations, they display no reaction to buy recommendations and selling pressure following hold recommendations. This “discounting” is even more pronounced when the analyst is affiliated with the underwriter. Small traders, instead, follow recommendations literally. They exert positive pressure following both buy and strong buy recommendations and zero pressure following hold recommendations. We discuss possible explanations for the differences in trading response, including information costs and investor naiveté.

Analyst Self-Confidence and Forecast Rationality

This paper investigates the bias and over- or under-reaction to previous years earnings using data from years between 1988 and 2005. The purpose is to study the effect of analysts' recommendations on these issues. In most of the previous literature it has been found that there is a positive bias in analyst's forecasts, and that they over-react to previous earnings changes. In this study, it is hypothesized that analysts' self-confidence can be seen in the accuracy of the forecasts. Self-confidence is measured with whether an analyst gives a clear recommendation (strong buy, buy, underperform, sell) or not. It is hypothesized that analysts' self-confidence can be seen in the accuracy of the forecasts. If an analyst is confident of his or her forecast, he or she would be more willing to give a recommendation on the company under investigation. First, it is found that the forecasts are overly optimistic in average, and that there is clear over-reaction to previous earnings changes. This is in accordance to previous studies. Second, according to the results, the optimism is greater for those forecasts that are equipped with a recommendation, but, the over-reaction is greater for the forecasts that are not equipped with any recommendation.

Pooling the Good and the Bad: A Re-Examination of the Performance of Underwriter Analyst Recommendations

This study re-examines the performance of analyst recommendations on newly public firms. Specifically, we examine the return performance associated with the stock recommendations of both underwriter and unaffiliated analysts. Using post-recommendation returns of IPO offerings during the period 1993 through 2002, we document that (i) Strong Buy recommendations by lead underwriter analysts exhibit inferior performance relative to those of non-lead analysts. The differences in post-recommendation returns between lead and non-lead underwriters do not persist in any of the other recommendation categories; (ii) the long-term underperformance of underwriter analysts' recommendations increases with the difference between the event-period market reactions towards positive and negative recommendations; (iii) the underperformance of lead-underwriter analysts' Strong Buy recommendations increases with aggregate market uncertainty. These results are consistent with a dynamic cheap talk game where analysts facing conflicts of interest and reputation consequences are more likely to elevate a subset of the worst stocks to the strongest category when the short-term incentive becomes sufficiently strong.