Do Analyst Stock Recommendations Piggyback on Recent Corporate News? An Analysis of Regular-Hour and After-Hours Revisions

The Value of Ranked Analysts’ Recommendations

“…While the previous study by Li et al (2015) documents that the contemporaneous-with-news recommendation changes have higher market impact than the earnings announcements themselves since such recommendations help investors interpret the news, some of such recommendations might simply be piggybacking on the news without providing more value to investors. Excluding the recommendations that were issued on the same days as the earnings announcement dates obtained from the Compustat database (accounted for 3.4 percent of recommendations) shows that the main conclusions of this study remain the same, though the alphas were insignificantly decreased.…”

“…A large number of academic studies is dedicated to the conflict of interests in equity research that arises because brokers spend billions of dollars each year on equity research with the goal of generating trading commissions and assisting corporate advisory services (Lin and McNichols, 1998;Irvine, 2000;Li et al, 2015). In the academic literature, there are two main arguments for viewing analysts as a marketing tool and, thus, for questioning the objectivity and value of analysts' forecasts.…”

“…On the other hand, there are numerous studies that argue against the piggybacking hypothesis by documenting a significant value in analysts' recommendations (Womack, 1996;Barber et al, 2001;Asquith et al, 2005;Boni and Womack, 2006;Li et al, 2015). These studies either report significant post-announcement drift or show that a portfolio that is built according to the analysts' recommendations generates significant abnormal returns.…”

“…These studies either report significant post-announcement drift or show that a portfolio that is built according to the analysts' recommendations generates significant abnormal returns. A recent study by Li et al (2015) investigates the link between corporate news and analysts' recommendations and shows that only approximately 28% of all recommendations directionally confirm the preceding corporate events. The authors find that these "confirming revisions" facilitate the information discovery of corporate events and thus cannot be dismissed as piggybacking.…”

“…However, an event-study approach does not allow to measure profits on implementable investment strategies (Barber et al, 2001). The primary drawback of an event study with respect to measuring the performance of recommendations is the existence of confounding events, which makes it difficult to disentangle the recommendation price effect from the price reactions to corporate news at the time of the event (Li et al 2015). Another difficulty is to isolate a price reaction to a particular recommendation because recommendations can be issued at any given point in time throughout the year at various frequencies for firms of various sizes and sector groups.…”