Does Analyst Optimism Fuel Stock Price Momentum?

Researchers have struggled to find rational risk factors that explain momentum profits derived from buying recent winners and shorting recent losers. Behavioral explanations have been offered that focus on the tendencies of investors to underreact to news and recommendations. Our study provides an a...

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Bibliographic Details
Published in:	The journal of behavioral finance Vol. 24; no. 4; pp. 411 - 427
Main Authors:	Lockwood, Jimmy, Lockwood, Larry, Miao, Hong, Uddin, Mohammad Riaz, Li, Keming
Format:	Journal Article
Language:	English
Published:	Philadelphia Routledge 02-10-2023 Taylor & Francis Ltd
Subjects:	Analyst recommendation optimism Cognitive bias Confirmation bias Sell-side analysts Stock price momentum
Online Access:	Get full text
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Summary:	Researchers have struggled to find rational risk factors that explain momentum profits derived from buying recent winners and shorting recent losers. Behavioral explanations have been offered that focus on the tendencies of investors to underreact to news and recommendations. Our study provides an alternative explanation centered on the behavior of sell-side analysts. We find a change in consensus recommendation from a hold to a buy is accompanied by an increase in momentum profits of 3.40% annually. Momentum profits fall, yet remain material, after the passage of Reg FD and the enactment of the Global Analyst Research Settlement. Our results support a behavioral explanation of investor cognitive biases fueled by analyst regency and optimism biases.
ISSN:	1542-7560 1542-7579
DOI:	10.1080/15427560.2022.2025595