Finance

This study examines how analysts respond to public information when setting their stock recommendations. Specifically, for a sample of stocks that experience large stock price movements, we model the determinants of analysts’ recommendation changes. Using an ordered probit model based on all available IBES stock recommendations from 1993 to 1999, we find evidence of an asymmetry following large positive and negative returns. Large stock price changes are associated with more frequent changes in analyst’s recommendations. Following large stock price increases, analysts are equally likely to upgrade or downgrade. Following large stock price declines, however, analysts are much more likely to downgrade the company’s stock. This asymmetry exists even after accounting for investment banking relationships and herding behavior. Further, this asymmetry cannot be explained by differences in the predictability of future returns. This result suggests that recommendation changes are “sticky” in one direction, with analysts reluctant to downgrade securities. Moreover, this result implies that analysts’ optimistic bias is not static, but varies through time.