Are Analyst Recommendations Informative?

S.G. Badrinath and Sugato Chakravarty ()

Purdue University Economics Working Papers from Purdue University, Department of Economics

Abstract: We investigate the efforts of public announcements of analyst recommendations on the bid-ask spreads, the corresponding bad and ask depths and on trading volume of the associated stocks. Using a sample of analyst recommendations made on all stocks trading in the NYSE and AMEX over an 18-month period, between 1994 and 1995, we find that public announcements of analyst recommendation changes are accompanied by no significant widening of the bid-ask spreads over the preannouncement period of 10 days, including the day of the public announcement of analyst recommendations. Both the bid and ask depths, however, increase significantly over the preannouncement period and are significantly higher on announcement day. Consistent with the evidence on depths, both trades and trading volume, including large and small size trades as well as buyer and seller initiated trades, show a significant and symmetrical increase leading up to the announcement day and decline thereafter. In balance, however, the overall increase in volume appears to be dominated by large size trades. In sum, our results are consistent with an increase in market liquidity over the preannouncement period, and appear to cast doubt on the proposition that analyst recommendation changes are informative events.

Pages: 42 pages
Date: 2000-02
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Persistent link: https://EconPapers.repec.org/RePEc:pur:prukra:1129

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