Market Structure, Informed Trading, and Analysts' Recommendations

Sok Tae Kim, Ji-Chai Lin and Myron B. Slovin

Journal of Financial and Quantitative Analysis, 1997, vol. 32, issue 4, 507-524

Abstract: We examine stock price behavior in response to initial coverage, buy recommendations that are pre-released to important clients before the stock market opens, and find a strong positive valuation effect at the open. On average, it takes five minutes of trading for NYSE/AMEX stocks and 15 minutes for NASDAQ stocks to reflect the private information contained in these analyst recommendations, so when informational asymmetry is high, the centralized call market is more efficient than a competitive, but fragmented dealer market. Public news release leaves share prices unaltered. Overall, competition among informed traders causes private information to be rapidly incorporated into stock prices.

Date: 1997
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