This paper investigates the market reaction to the information released in security analyst reports. It shows that the market reacts significantly and positively to changes in recommendation levels, earnings forecasts, and price targets. While changes in price targets and earnings forecasts both provide information to the market, revisions in price targets have a larger and more significant impact than comparable revisions in earnings forecasts. The text of the report is also a significant source of information as it provides the justifications supporting an analyst's summary opinion.When all of this information is considered simultaneously, some of it, notably the earnings forecasts, is subsumed. The results further show that analysts correctly predict price targets slightly over 50% of the time. Finally, the valuation methodology used does not seem to be correlated with either the market's reaction or the analyst's accuracy. IntroductionThis paper investigates the association between market returns and the content of security analysts' reports. In addition, it provides the first detailed catalog of the elements in a typical analyst report. An analyst's report is the culmination of a process that includes the collection, evaluation, and dissemination of information related to a firm's future performance. The majority of these reports include three key summary elements: earnings forecasts, a stock recommendation -such as buy, sell, or hold -and a price target. In addition, many reports present extensive quantitative and descriptive analysis supporting these summary elements. Using a database constructed from analyst reports issued during 1997-1999, we examine if, after controlling for changes in earnings forecasts and summary recommendations, the market's response to the release of a security analyst report varies with price target changes and other information contained in the report. Our analysis shows that changes in the summary stock recommendations, earnings forecasts, and price targets all provide independent information to the capital markets. In particular, incorporating changes in analyst price targets dramatically increases the fit of our regression results over that obtained from earnings forecast revisions and discrete recommendations alone.Adding proxies for other information in a report, such as the strength of the written arguments made to support an analyst's opinion, significantly alters our results. As expected, the stronger the justifications provided in the report, the larger the market's reaction to the report.After including this additional information in our model, our results show that although the market reaction is still correlated with changes in price targets, the significance of earnings forecast revisions decreases. Moreover, while our recommendation downgrades remain statistically negative, the significance of recommendation upgrades is eliminated. Recent reductions in the recommendation levels used by some firms (e.g., from five to three by Merrill Lynch and Goldman Sachs...
We catalog the complete contents of All-American Analyst reports and examine the market reaction to their release. Including the justifications supporting an analyst's opinion reduces, and in some models eliminates, the significance of earnings forecasts and recommendation revisions. Analysts both provide new information and interpret previously released information. The information in a report is most important for downgrades; target prices and the analyst's justifications are the only significant elements for reiterations. No correlation exists between valuation methodology and either analyst accuracy or the market's reaction to a report. Our adjusted R 2 s are much larger than those of studies using only summary measures. JEL classifications: G11; G14; G24; M41Keywords: Stock recommendations; Price targets; Earnings forecasts; Security analysts. ______________________________________________________________________________ We thank Jennifer Francis, SP Kothari, Grace Pownall, Jay Ritter, Philip Stocken, Wanda Wallace, Beverly Walther, Richard Willis, the referee for this journal, and workshop participants at MIT, Penn State, The College of William and Mary, Wharton, SESARC, and the AAA Annual Meeting for helpful comments and suggestions. We also acknowledge the research assistance of Jeff Braun, Kevin Kadakia, Rossana Ivanova, and Xin Wang. Ms. Au is employed as a Research Analyst with The Brattle Group, Inc. IntroductionThis paper investigates the association between market returns and the content of security analysts' reports. In addition, it provides the first detailed catalog of the elements in a typical analyst report. An analyst's report is the culmination of a process that includes the collection, evaluation, and dissemination of information related to a firm's future performance. The majority of these reports include three key summary measures: earnings forecasts, a stock recommendation -such as buy, sell, or hold -and a price target. In addition, many reports present extensive quantitative and qualitative analysis supporting these summary measures.Most previous research on analyst reports examines revisions in only two summary elements: stock recommendations and earnings forecasts. We extend this research by incorporating the contents of analyst reports in their entirety rather than just the individual summary elements such as the stock recommendation. One problem in evaluating stock recommendations alone is that there are a limited number of recommendation levels. More specifically, although analysts have five distinct recommendations -strong buy, buy, hold, sell, and strong sell -at their disposal, they are generally reluctant to use the two negative ratings (see, e.g., Barber, Lehavy, McNichols, and Trueman, 2001; Mikhail, Walther, and Willis, 2004). 1 By also incorporating the gradations available in the analysts' price targets and the reports' contents, we overcome many of the disadvantages caused by the use of a few discrete recommendation categories. Our approach to this analysis is c...
We investigate if earnings forecast accuracy matters to security analysts by examining its association with analyst turnover. Controlling for firm- and time-period effects, forecast horizon and industry forecasting experience, we find that an analyst is more likely to turn over if his forecast accuracy is lower than his peers. We find no association between an analyst's probability of turnover and his absolute forecast accuracy. We also investigate another observable measure of the analyst's performance, the profitability of his stock recommendations. There is no statistical relation between the absolute or relative profitability of an analyst's stock recommendations and his probability of turnover. We interpret our findings as indicating that forecast accuracy is important to analysts.
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