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Are stars' opinions worth more? The relation between analyst reputation and recommendation values

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We study the effect of personal reputation on the values of analysts' stock recommendations using the 1994-2003 US data. All-American (AA) analysts' buy recommendations earn significantly positive abnormal returns over the 10-year period. Buy recommendations of analysts at top-tier banks also earn significantly positive abnormal returns, but only AAs contribute to this outperformance; top-tier non-AAs' buy recommendations do not provide positive abnormal returns.Interestingly, sell recommendations made by all four sub-groups of analysts (top-tier AA, top-tier non-AA, lower-status AA, lower-status non-AA) have significant investment value. Among them, top-tier-bank analysts outperform lower-status-bank analysts. Comparing investment performances across groups, we find that top-tier AAs outperform all the other groups in both buy and sell categories. The value of their recommendation is economically significant. For buys, they outperform the market by 6.12% per year in raw returns, and by 4.35% and 2.59% per year in market- and Fama-French three-factor adjusted returns, respectively. For sells, their market- and three-factor-adjusted returns are 3.56% and 6.9% per year, respectively. These results indicate that active sell-side research has value, and that personal reputation is positively related to recommendation value. We document evidence consistent with the existence of conflict of interest in top-tier investment banks. We find that buy recommendations made by top-tier non-AAs outperformed all other groups in the peak year of 1999, but they yielded negative and the lowest abnormal returns in the subsequent trough of 2000. Since top-tier analysts generally have superior skill, this volatile performance pattern is consistent with top-tier non-AAs aggressively touting "glamour" stocks during market booms and subsequently being reluctant to downgrade their former champion stocks in the following bear market. In contrast, since top-tier AAs' recommendations remain valuable during the troughs of the market, our results indirectly suggest that personal reputation, as indicated by the AA status, can play a mitigating role in the conflict of interest problem and thus has a net positive effect on the value of analysts' stock recommendations.

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en

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application/pdf

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http://flora.insead.edu/fichiersti_wp/inseadwp2007/2007-12.pdf

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