Title

Does Analyst Optimism Fuel Stock Price Momentum?

Campus

Dahlonega

Publication date

1-13-2022

Publisher

Taylor and Francis Ltd.

Book or Journal Information

Journal of Behavioral Finance

Keywords

Stock price momentum, Sell-side analysts, Cognitive bias, Confirmation bias, Analyst recommendation optimism

Abstract

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.

Author Biography

Dr. Jimmy Lockwood serves as assistant professor of finance in the Mike Cottrell College of Business at the University or North Georgia. He his an active member of the Financial Management Association, Southern Finance Association and the Southwestern Finance Association.

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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 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.