The Information Content Of Analysts' Recommendations

The purpose of the analyst' recommendations is to provide information related to decision making to the information consumer.If recommendations can generate statistically significant abnormal returns,it can be said that the recommendations have information content.If firm recommendations and industry recommendations pass new and useful information to the market,they would have value to investors.Focus on price reaction of the stock market,this paper investigates the information usefulness of the combination of firm and industry recommendations.Firm recommendations take a bottom-up approach,whereas industry recommendations take a top-down approach.Different approach probably result in different information content.The former mainly contain firm-levelinformation,whereas the latter mainly contain market-and industry-level information.Combining firm recommendations and industry recommendations would probably generate incremental information which is valuable to investors.If firm recommendations use a market benchmark,we would expect they contain market-and industry-level information.Combining firm recommendations and simulate industry recommendations(industry-aggregated analyst recommendations)would also probably generate higher investment value.Underwriting relationship,reputation and market circumstances would probably affect the information content of the combination of firm recommendations and industry recommendations.The main research contents and conclusions are stated as follows:(1)The consensus recommendation level is used to measure the recommendation level.The consensus recommendation change and the net recommendation change are used to measure the recommendation change.The consensus recommendation change is a change in the consensus recommendation level(the mean of recommendations).Analysts who make up the former and the latter consensus recommendation level may be different,which represent different opinions of different analysts,instead of the emergence of new and useful information.The net recommendation change is the aggregate of the recommendation changes by multiple analysts for the same firm(industry).Each change in the net recommendation change is the change in the views of the same analyst.Changes in the views of the same analyst are likely to represent the emergence of new and useful information.The construction of the consensus recommendation portfolios is based on the dynamically adjusted criteria.The cutoffs for the "good" and "bad" portfolios each year are set equal to the 20th and 80th percentiles,respectively,of the prior year's distribution of consensus recommendations.The dynamically adjusted criteria are chosen so as to achieve a high degree of separation across firms(industrys)in the sample while retaining sufficient power for my tests.After constructing the portfolios,I use the CAPM model,the Fama-French three-factor model and the Carhart four-factor model to calculate the monthly risk-adjusted abnormal returns of the portfolios.(2)The monthly firm recommendations contain information content.The monthly "net upgraded" firm recommendations have a higher information content than the monthly "most favorable" firm recommendations.The information content of the monthly industry recommendations is not statistically significant.The information content of the combination of monthly firm and industry recommendations is higher than those using monthly firm or industry recommendations only.The combination of monthly "net upgraded" firm and industry recommendations has a higher information content than the combination of monthly "most favorable" consensus firm and industry recommendations.The information content of the combination of monthly consensus firm and industry recommendations changes is not statistically significant.Optimistic recommendations and pessimistic recommendations led to a different market reaction.This is related to China's analyst' recommendations have strong optimism bias and analysts focus on optimistic recommendations only.The information content of monthly simulate industry recommendations(industry-aggregated analyst recommendations)is not statistically significant.The investment value of the combination of monthly firm and simulate industry recommendations is higher than those using monthly firm or simulate industry recommendations only.The true monthly industry recommendations have a higher information usefulness than monthly simulate industry recommendations.(3)The combination of monthly firm and industry recommendations appears to be permanent,information effects,instead of temporary,price pressure effects.Smaller firms react more strongly to the combination of optimistic monthly firm and industry recommendations.After excluding price momentum and industry momentum from the combination of monthly firm and industry recommendations,the information content remains.(4)The underwriting relationship has a negative impact on the information content of the combination of monthly firm and industry recommendations.The optimism of the underwriter analysts' recommendations is higher.The information content of the combination of underwriter analysts' monthly firm and industry recommendations is not statistically significant.The combination of non-underwriter analysts' monthly firm and industry recommendations contains information content.The combination of non-underwriter analysts' monthly "most favorable" consensus firm and industry recommendations has a higher information content than the underwriter analysts'.The reputation has some impact on the information content of the combination of monthly firm and industry recommendations.The optimism of the star analysts' recommendations is higher.The information content of the combination of star analysts' monthly "most favorable" consensus firm and industry recommendations is not statistically significant.The combination of non-star analysts' monthly firm and industry recommendations contains information content.Although it looks that the combination of non-star analysts' monthly "most favorable" consensus firm and industry recommendations has a higher information content than the star analysts',the difference between them is not statistically significant,but it is very close to the 10%level.Although it looks that the combination of "bull" market's monthly firm and industry recommendations has a higher information content than the "bear" market's,the difference between them is not statistically significant however.(5)Since optimism bias may affect the information content of the combination of monthly firm and industry recommendations,it is necessary for regulators to implement mandatory disclosure rules.Analyst research reports are required to disclose the percentage of the recommendations that are buys,holds,and sells,and the benchmark for recommendations.Regulators could also relax short selling restrictions further,so analysts have incentives to gather negative information,and the information content of the combination of monthly firm and industry recommendations would be higher.