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Information content of analyst recommendations in the banking industry

Author

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  • Premti, Arjan
  • Garcia-Feijoo, Luis
  • Madura, Jeff

Abstract

We investigate whether analyst recommendations about banks become more valuable in periods when the information environment for banks is more uncertain. The degree of uncertainty in the information environment for banks is time-varying because of time-varying changes in information asymmetry for banks and in bank regulations. Based on a sample of 23,632 analyst recommendations of 1106 banks, we find that analyst recommendations are more informative for banks that are riskier and subject to a higher degree of information asymmetry. Furthermore, regulations that reduce the information asymmetry (Sarbanes-Oxley Act) or the risk (Dodd-Frank Act) of the banking industry also reduce the information content of analyst recommendations, while regulations that increase the risk of the banking industry (Gramm-Leach-Bliley Act) increase the information content of analyst recommendations. Our results suggest the role of an analyst is more valuable when the information environment is more uncertain.

Suggested Citation

  • Premti, Arjan & Garcia-Feijoo, Luis & Madura, Jeff, 2017. "Information content of analyst recommendations in the banking industry," International Review of Financial Analysis, Elsevier, vol. 49(C), pages 35-47.
    • Handle: RePEc:eee:finana:v:49:y:2017:i:c:p:35-47
    DOI: 10.1016/j.irfa.2016.11.005
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    Cited by:

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    5. Nikbakht, Ehsan & Sarkar, Sayan & Smith, Garrett C. & Spieler, Andrew C., 2021. "Pre-IPO earnings management: Evidence from India," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 44(C).

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    More about this item

    Keywords

    Analyst recommendations; Banking; Information asymmetry; Bank risk; Bank complexity; Bank regulation;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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