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The Cross Section of Analyst Recommendations

Published online by Cambridge University Press:  06 April 2009

Sorin Sorescu  and
Avanidhar Subrahmanyam
Sorin Sorescu
Affiliation:
ssorescu@mays.tamu.edu, Mays Business School, Texas A&M University, College Station, TX 77843
Avanidhar Subrahmanyam
Affiliation:
subra@anderson.ucla.edu, The Anderson School, University of California at Los Angeles, 110 Westwood Plaza, Los Angeles, CA 90095.
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Abstract

We analyze the price reaction to analysts' revisions by testing the Griffin and Tversky (1992) hypothesis that agents place emphasis on the strength of the signal (the dramatic nature of the event) and may de-emphasize the weight (the ability of the analyst making the recommendation). Two attributes, namely, years of experience and the reputation of the analysts' brokerage houses form proxies for analyst ability (or weight) that we validate by documenting that revisions by high ability analysts outperform those by low ability ones. We find evidence of return persistence following small (low strength) revisions by high ability analysts and the opposite return pattern following large (high strength) revisions of low ability analysts, consistent with the arguments of Griffin and Tversky (1992). Our study provides an empirical link between evidence on individual decision making and stock market returns, and also helps promote an understanding of the analyst industry as well as its interaction with the investing population.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 41 , Issue 1 , March 2006 , pp. 139 - 168
Copyright
Copyright © School of Business Administration, University of Washington 2006

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