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The Correlation Between Stock Returns Before And After Analyst Recommendation Revisions

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  • Andrey Kudryavtsev

Abstract

In this study I analyse the correlation between stock returns before and after analyst recommendation revi-sions. I hypothesise that if a recommenda-tion revision for a given stock takes place after a short period when the stock’s price moves in the opposite direction, it may in-dicate that the fundamentals that caused the analyst to revise their recommendation are less completely (if at all) incorporated in the stock price, significantly increasing the probability of subsequent post-event price drift. Analysing a large sample of rec-ommendation revisions, I document that both recommendation upgrades and down-grades are followed by significant one-to-six-month price drifts (reversals) if they are preceded by the opposite-sign (same-sign) short-term cumulative abnormal returns. The effect remains significant after ac-counting for additional relevant company-specific (size, Market Model beta, historical volatility) and event-specific (stock’s return and trading volume on the event day, bro-kerage firm size, analyst experience, rec-ommendation category before the revision, number of categories changed in the revi-sion) factors.

Suggested Citation

  • Andrey Kudryavtsev, 2021. "The Correlation Between Stock Returns Before And After Analyst Recommendation Revisions," Economic Annals, Faculty of Economics and Business, University of Belgrade, vol. 66(228), pages 69-100, January –.
    • Handle: RePEc:beo:journl:v:66:y:2021:i:228:p:69-100
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    References listed on IDEAS

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    2. Jaeyong Lee & Jonathan A. Batten & Hyuna Ham & Doojin Ryu, 2024. "Does Portfolio Momentum Beat Analyst Advice?," Abacus, Accounting Foundation, University of Sydney, vol. 60(2), pages 338-364, June.

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    More about this item

    Keywords

    analyst recommendation revisions; behavioural finance; under-reac-tion; stock price drifts;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G19 - Financial Economics - - General Financial Markets - - - Other

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