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- Title
INVESTMENT ANALYST RECOMMENDATIONS: A TEST OF `THE ANNOUNCEMENT EFFECT' AND `THE VALUABLE INFORMATION EFFECT'
- Authors
Bauman, W. Scott; Datta, Sudip; Iskandar-Datta, Mai E.
- Abstract
This article examines long-run stock price response to investment analysts' recommendations. Previous studies focused on the short-run stock price response to analysts' recommendations. By examining the short-run and long-run price responses to such recommendations, this study enables researchers to shed additional light on the issue of whether the previously reported price impact is merely an announcement effect or is due to the disclosure of valuable information. Researchers document significantly positive/negative price impacts on the publication day for the buy/sell portfolio, thus, the market appears to process promptly analysts' recommendations based on the immediate short-term response of stock prices on the publication date of the Heard on the Street (HTS) column. Interestingly, the pattern of cumulative abnormal returns for the buy and sell portfolios seem symmetric in the pre-publication event period but asymmetric in the post-publication event period. In the pre-publication event window, researchers find significant positive/negative cumulative abnormal returns for the buy/sell portfolio. However, in the post-publication event window, the buy portfolio experiences a cumulative loss of 1.29% by the 8th day, while the sell portfolio experiences an increase in value of 3.44% by the 30th day. After considering round-trip transaction costs, the short-term investor cannot readily gain much in abnormal returns from following a trading strategy based on HTS recommendations. The results of longer term analysis supports the previously untested valuable information hypothesis. It is documented that for six- and twelve-month holding periods beginning on the publication day, the buy/sell portfolio outperformed the market portfolio by a significant margin. Thus, it appears that the investment recommendations of security analysts are economically more valuable for long-term investors as compared to short-term traders.
- Publication
Journal of Business Finance & Accounting, 1995, Vol 22, Issue 5, p659
- ISSN
0306-686X
- Publication type
Academic Journal
- DOI
10.1111/j.1468-5957.1995.tb00381.x