Spillover Effects of Analyst Recommendations in the Banking Industry

Abstract

We find that analyst recommendations of banks result in spillover effects on the rival banks. The rival banks react is in the same direction as the rated bank, and the spillover effect depends on the rival's characteristics. These results suggest that the spillover effects in the banking industry are contagious and informed. The contagion effect is greater for riskier rivals and recommendations issued during riskier periods. Regulations that increased bank risk also increased the contagion of analyst recommendations. The contagion effect is greater for larger rivals and rivals with larger analyst following. The contagion effect is greater for positive recommendations.