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

• 成果类型: Article
• 署名作者: Kecskes, Ambrus; Michaely, Roni; Womack, Kent L.
• 署名单位: York University - Canada; Cornell University; University of Toronto
• 刊物名称: MANAGEMENT SCIENCE
• ISSN/ISSBN: 0025-1909
• DOI: 10.1287/mnsc.2015.2385
• 发表日期: 2017
• 页码: 1855-1871
• 关键词: equity research analysts; investment recommendations; earnings estimates; growth rates; INFORMATION; valuation; asset pricing; trading strategy

摘要

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 earningsbased 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.