Analysts’ recommendations: from which signal does the market take its lead?
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- Brown, R., Chan, H.W.H. & Ho, Y.K. Rev Quant Finan Acc (2009) 33: 91. doi:10.1007/s11156-009-0107-1
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The stock market may respond to the difference between an analyst’s recommendation and that analyst’s previous recommendation and/or to the difference between the analyst’s recommendation and the consensus recommendation. We show that for the short-term market response the former is the clearer signal when both are examined simultaneously. We also show that the market’s reaction is strongly influenced by the analyst’s reputation, the divergence of opinion among analysts and the number of analysts following the stock. Previous studies have been hampered by having a low proportion of negative recommendations. We overcome this deficiency by studying the Australian market, in which institutional differences lead to analysts releasing many more negative recommendations.