Security analysts and capital market anomalies

• Main Authors: GUO, Li, LI, Frank Weikai, WEI, K.C. John
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2020
• Subjects: Analysts; Analyst recommendation; Mispricing; Market efficiency; Finance and Financial Management; Portfolio and Security Analysis
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/5937; https://ink.library.smu.edu.sg/context/lkcsb_research/article/6936/viewcontent/SSRN_id3101672.pdf
• Institution: Singapore Management University

We examine whether analysts use information in well-known stock return anomalies when making recommendations. We find results contrary to the common view that analysts are sophisticated information intermediaries who help improve market efficiency. Specifically, when analysts make more favorable recommendations to stocks classified as overvalued, these stocks tend to have particularly large negative abnormal returns ex post. Moreover, analysts whose recommendations are more aligned with anomaly signals are more skilled and elicit greater recommendation announcement returns. Our results suggest that analysts' biased recommendations could be a source of market frictions that impede the efficient correction of mispricing.