Analyst Trading Ideas Have Greater Impact Than Buy/Sell Recommendations

Trading ideas from analysts have a three times greater impact on stock prices during the day of the announcement than either target price or earnings forecast revisions.

Moreover, the impact on stock’s price increases over the following three-month period without exhibiting signs of a reversal.

After adjusting for other factors (valuation, stock price momentum, etc.), trade buys realize an additional 0.90% gain during a three-month period starting two days after the recommendation was issued. Trade sells go into decline by an additional 1.5% on an adjusted basis over the same period.

Analyst trading ideas, by definition, are intended to be short-term in nature. In contrast, analyst recommendations and target prices tend to cover periods of 12 to 15 months.

The average (median) trading recommendation covers a period of just 53 (60) days. Most (98%) have a time duration of between one week and three months. They tend to mostly be motivated by a firm catalyst, particularly upcoming firm news mostly not involving earnings. About 20% of trading ideas are related to temporary mispricing. Notably, 30% of trading calls go against an analyst’s own stock recommendation (e.g., a short-term trading call to sell a stock that the analyst has recommended as a long-term buy).

Not all analysts issue trading calls. Those who do tend to have more established recommendations. They are also more likely to be designated as being an “all-star.” At the same time, analysts who issue more trading calls are more likely to be included in the All-American Research Team roster. Another common trait is employment by a large brokerage firm. These firms often have a large base of institutional clients who, in turn, generate commissions by acting on the trading recommendations. “Collectively, the evidence is consistent with brokers selectively focusing trading calls on stocks for which they receive the greatest monetary benefits,” observe the study’s authors.

The study analyzed 4,543 trading calls issued over the period of 2000 through 2015. The calls were issued by 77 unique brokers and 688 unique analysts on 1,619 unique firms. Trading reports were identified by focusing on reports with variants of “trading/tactical research,” “trading/tactical call,” “trade idea” and “trade alert.”

Source: “Are Analyst Trade Ideas Valuable?;” Justin Birru, Sinan Gokkaya, Xi Liu and René M. Stulz; National Bureau of Economic Research; July 2019.