Do Earnings Estimates Add Value to Sell-Side Analysts’ Investment Recommendations?

Ambrus Kecskés (), Roni Michaely and Kent Womack
Additional contact information
Ambrus Kecskés: Schulich School of Business, York University, North York, Ontario M3J 1P3, Canada

Management Science, 2017, vol. 63, issue 6, 1855-1871

Abstract: Sell-side analysts change their stock recommendations when their valuations differ from the market’s. These valuation differences can arise from either differences in earnings estimates or the nonearnings components of valuation methodologies. We find that recommendation changes motivated by earnings estimate revisions have a greater initial price reaction than the same recommendation changes without earnings estimate revisions: about +1.3% (−2.8%) greater for upgrades (downgrades). Nevertheless, the postrecommendation drift is also greater, suggesting that investors underreact to earnings-based recommendation changes. Implemented as a trading strategy, earnings-based recommendation changes earn risk-adjusted returns of 3% per month, considerably more than non-earnings-based recommendation changes. Evidence from variation in firms’ information environment and analysts’ regulatory environment suggests that recommendation changes with earnings estimate revisions are less affected by analysts’ cognitive and incentive biases.

Keywords: equity research analysts; investment recommendations; earnings estimates; growth rates; information; valuation; asset pricing; trading strategy (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

Downloads: (external link)
https://doi.org/10.1287/mnsc.2015.2385 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:63:y:2017:i:6:p:1855-1871

Access Statistics for this article

More articles in Management Science from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().