TITLE: CAN ANALYSTS PICK STOCKS FOR THE LONG RUN?
Authors: Oya Altınkılıç, Robert S.Hansen, Liyu Ye
Publication: Journal of Financial Economics, 119 (2016) 371–398
Link: Altinkiliç et al. (2016)
#What is the Research Question? :
Given the rise in supercomputing and algorithmic trading, are changes in stock recommendations consistent with the post-revision pattern observed in stock returns?
Simply put, are recommendation upgrades (or downgrades), followed by positive (or negative) returns?
#What is the Academic Insight? :
(1) The primary contribution is the finding that the average post-revision drift in stock returns is no longer significantly different from zero in the May2003 to 2010 sample post-period. That is, there is little to no stock return pattern following analyst revisions to their recommendations.
(2) There is no significant relationship between stock return patterns following analyst revisions and the breadth of analyst coverage of stocks.
(3) Reductions in transaction costs were associated with the disappearance of the post-revision drift in returns during the sample period (2003-2010).
(4) Revisions are increasingly associated with other company news and company events, complicating and perhaps masking the true impact of the revision on stock prices.
#Why Does It Matter? :
Analyst revisions to their published stock recommendation do not provide investors with useful information about the long-run path of future stock prices. Transaction costs have declined to historic lows due to decimilization in prices and algorithmic trading, prevalent during the sample period of this study. This observation is consistent with a reduced role for analysts in terms of the discovery and dissemination of new information regarding the stocks they follow.