Do sentiment trades explain investor overconfidence around analyst recommendation revisions?

Karam Kim, Doojin Ryu and Jinyoung Yu

Research in International Business and Finance, 2021, vol. 56, issue C

Abstract: This study examines irrational stock market reactions to analyst recommendation revisions depending on investor sentiment levels prior to analyst report announcements. We construct a firm-specific sentiment indicator by extending Huang et al. (2015, Review of Financial Studies, 28, pp.791–837). Analyst recommendation revisions have more pronounced effects for downgrades, which is attributable to sentiment effects. Domestic investors tend to react less to upgrades (downgrades) news when their prior beliefs are pessimistic (optimistic), implying that they are overconfident. The domestic investors drive sentiment trades, whereas foreign investors are not biased.

Keywords: Analyst recommendation; Behavioral finance; Domestic investors; Firm-specific sentiment; Overconfidence (search for similar items in EconPapers)
JEL-codes: G11 G14 G41 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (18)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:riibaf:v:56:y:2021:i:c:s0275531920309843

DOI: 10.1016/j.ribaf.2020.101376

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