Essays on Information and Conflicts of Interest in Stock Recommendations

Abstract

This thesis brings together three separate empirical essays on the information and conflicts of interest in stock recommendations.

The first essay analyzes stock-price reactions to recommendations published in printed Swedish media and also trading volumes at and around the publication day, bid/ask spreads, and the post-publication drift in recommended stocks for the period 1995-2000. Its small size and limited number of actors makes the Swedish stock market an interesting comparison to the U.S. stock markets. The positive publication-day effect for buy recommendations was almost fully reversed after 20 days, supporting the price-pressure hypothesis, and the effect for sell recommendations was negative and prices continued to drift down, supporting the information hypothesis. Analysts seem to hand their information to private clients before publication, whereas no such information-leaking pattern was observed for recommendations from journalists. The impact to recommendations from journalists was significantly larger than analyst recommendations, implying a tradeoff between the size of pre- publication cumulative abnormal returns and the publication-day effect.

The second essay analyzes the initiated and changed recommendations published in six well-known Swedish newspapers and business magazines for the period 1996-2000 using a buy-and-hold abnormal returns (BHARs) approach. As was done in essay 1, the results here distinguish between recommendations from analysts and journalists. Buy recommendations were misleading investors, whereas sell recommendations were leading them correctly. Overall all buy- and sell recommendations yield returns in line with the market. This asymmetry could be due to positive information from the management of the company being more intricate to interpret than negative and generally exaggerated in a positive direction. This phenomenon holds for recommendations from both analysts and journalists. Following buy- and sell recommendations from analysts yielded BHARs in line with those from following journalist recommendations, which in turn gives rise to returns in line with the market.

The third essay examines the credibility in underwriter analyst stock recommendations of Scandinavian IPO firms for the period 1996-2001. The excess returns for recommendations from underwriter analysts' versus those from non-underwriter analysts' in an environment without the quiet-period regulation is analyzed. Underwriter analyst recommendations are found to outperform non-underwriter analyst recommendations during the first year from publication, yielding substantially higher mean excess returns. Recommendations from underwriters comes sooner after the IPO date and performs worse before and in the days surrounding the recommendation date, showing no evidence that underwriters try to "boost" IPO firms in the aftermarket trading. The results support the superior information hypothesis.