The Pretty Good Analyst

• Activity Number: 176
• Type: Contributed
• Date/Time: Monday, August 10, 2015 : 10:30 AM to 12:20 PM
• Sponsor: Business and Economic Statistics Section
• Author(s): Chi Wan*
• Companies: University of Massachusetts Boston
• Keywords: Financial Analyst Recommendation ; Recommendation Revisions ; Recommendation Stickiness ; Asymmetric Frictions ; Duration

Abstract

We use MCMC methods to estimate a dynamic model of financial analysts' recommendations. We find overwhelming evidence that analysts acquire information with persistent valuation consequences that the econometrician does not observe, and that analysts revise recommendations reluctantly, introducing frictions to avoid frequent revisions. Estimates suggest that analysts structure recommendations strategically to generate profitable order flow from retail traders. Publicly-available data matters far less for explaining recommendation dynamics than persistent analyst information and recommendation revision frictions. We provide extensive evidence that our model describes how investors believe analysts make recommendations, and that investors value private information revealed by analysts' recommendations.