article

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

Authors:

Ambrus Kecskés,

Kent L. WomackAuthors Info & Claims

Management Science, Volume 63, Issue 6

Pages 1855 - 1871

https://doi.org/10.1287/mnsc.2015.2385

Published: 01 June 2017 Publication History

Abstract

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 earnings-based 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.

This paper was accepted by Wei Jiang, finance.

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Cited By

Gao MJi YRozenbaum O(2022)When Do Associate Analysts Matter?Management Science10.1287/mnsc.2021.405668:5(3925-3948)Online publication date: 1-May-2022
https://dl.acm.org/doi/10.1287/mnsc.2021.4056
Zeng DLiu YYan PYang Y(2021)Location-Aware Real-Time Recommender Systems for Brick-and-Mortar RetailersINFORMS Journal on Computing10.1287/ijoc.2020.102033:4(1608-1623)Online publication date: 1-Oct-2021
https://dl.acm.org/doi/10.1287/ijoc.2020.1020
Li XLin CZhan X(2019)Does Change in the Information Environment Affect Financing Choices?Management Science10.1287/mnsc.2018.309665:12(5676-5696)Online publication date: 1-Dec-2019
https://dl.acm.org/doi/10.1287/mnsc.2018.3096

Index Terms

Do Earnings Estimates Add Value to Sell-Side Analysts' Investment Recommendations?
1. Applied computing
  1. Enterprise computing
    1. Business process management
  2. Law, social and behavioral sciences
    1. Economics

Index terms have been assigned to the content through auto-classification.

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cover image Management Science

Management Science Volume 63, Issue 6

June 2017

392 pages

ISSN:0025-1909

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INFORMS

Linthicum, MD, United States

Publication History

Published: 01 June 2017

Accepted: 14 October 2015

Received: 13 November 2013

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Cited By

Gao MJi YRozenbaum O(2022)When Do Associate Analysts Matter?Management Science10.1287/mnsc.2021.405668:5(3925-3948)Online publication date: 1-May-2022
https://dl.acm.org/doi/10.1287/mnsc.2021.4056
Zeng DLiu YYan PYang Y(2021)Location-Aware Real-Time Recommender Systems for Brick-and-Mortar RetailersINFORMS Journal on Computing10.1287/ijoc.2020.102033:4(1608-1623)Online publication date: 1-Oct-2021
https://dl.acm.org/doi/10.1287/ijoc.2020.1020
Li XLin CZhan X(2019)Does Change in the Information Environment Affect Financing Choices?Management Science10.1287/mnsc.2018.309665:12(5676-5696)Online publication date: 1-Dec-2019
https://dl.acm.org/doi/10.1287/mnsc.2018.3096

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