This paper documents how analyst recommendations are related to periods of bubbles. We find a strong positive relation between the concentration in analyst buy recommendations and bubble continuation in two settings. First, we show a positive association between the concentration in buy recommendations and the tech bubble; the crash was associated with changes in buy recommendation concentration. Second, in an out-of-sample analysis of firms in multiple industries from 1994-2009, we show that analyst buy recommendation concentration predicts future return patterns that exhibit characteristics of a rational speculative bubble. While the evidence is not sufficient to conclude that analyst buy recommendations are the causal factor that perpetuates the mispricing, our findings suggest that, at a minimum, analysts do not act proactively to correct this form of mispricing in a timely manner.
Research Article| August 24 2020
Analyst recommendations and stock price bubbles
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Karthik Balakrishnan, Catherine Schrand, Rahul Vashishtha; Analyst recommendations and stock price bubbles. Journal of Financial Reporting doi: https://doi.org/10.2308/JFR-2017-0024
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