In this study I analyse the correlation between stock returns before and
after analyst recommendation revisions. I hypothesise that if a
recommendation revision for a given stock takes place after a short period
when the stock?s price moves in the opposite direction, it may indicate 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 recommendation revisions, I document that both
recommendation upgrades and downgrades are followed by significant
one-tosix-month price drifts (reversals) if they are preceded by the
opposite-sign (same-sign) short-term cumulative abnormal returns. The effect
remains significant after accounting for additional relevant company specific
(size, Market Model beta, historical volatility) and event-specific (stock?s
return and trading volume on the event day, brokerage firm size, analyst
experience, recommendation category before the revision, number of
categories changed in the revision) factors.
The correlation between stock returns before and after analyst recommendation revisions
