Analyst Recommendations: Price Impact and Stock Market Predictability

Sammanfattning: This paper examines the abnormal returns around analyst recommendation changes and the predictability of future returns when utilizing the mean opinion of "sell-side" brokers, i.e. the analyst market sentiment. In essence, the nature of analyst recommendations is being studied, relating both to the academic debate of market efficiency as well as to potential trading strategies. The existence and magnitude of abnormal returns are assessed on a three day cumulative basis in an event study, using both parametric and non-parametric methods. Non-standard OLS regressions, taking consideration of heteroskedasticity and autocorrelation, are executed when evaluating the predictive power of the analyst sentiment on returns. Our results show evidence of absolute abnormal returns greater than 1 percent both for recommendation changes defined as upgrades and downgrades, endorsing that recommendations have a significant short term impact. Furthermore, the analyst market sentiment is concluded to be a lagging rather than leading indicator of returns.