The efficiency of the Italian stock exchange: market reaction following changes in recommendations

Abstract

The main objective of this paper is to examine the market reaction to the recommendation changes issued by financial analysts. We study the peculiar case of Italy where analysts have to send their reports to the Stock Exchange Commission and the Stock Exchange the same day they give it to their clients. Reports are available on the Stock Exchange website. Our dataset includes about 5,200 reports issued on the 117 IPO firms that went public on the Italian Stock market between 1st January 1998 and 31st December 2003. We calculate abnormal returns and abnormal volumes associated with the dissemination of the reports and perform two short-term event studies: the first associated with the “report date”, the second one with regard to the “public access date”, i.e. when the report is freely and publicly available on the Stock Exchange website. The event study related to the public access date show very different results. We do not find statistically significant average abnormal returns around this date, indicating that the market efficiently does not react to the mere publication of the report on the Stock Exchange website, since prices already included the effect of the recommendation change at the report date, i.e. when the new information was given to analyst’s private clients. It remains to be investigated if the abnormal returns before the report date are due to the effect of news different from the recommendation change or if they show a violation of the Italian regulation.

The Impact of Financial Analyst Reports on Small Caps Prices in Italy

“…As for the recommendation revisions, the frequency of the downgrades is higher than that of the upgrades. This is consistent with the phenomenon known as the 'optimism bias' of financial analysts (O'Brien, 1988;Cervellati et al, 2008;Ramnath et al, 2008), claiming that analysts tend to be excessively optimistic in their initial forecasts before gradually revising their recommendations. Revisions took place especially after 2008, which is probably explained by the higher market volatility driven by the international financial crisis.…”

The Impact of Financial Analyst Reports on Small Caps Prices in Italy

“…This result is in line with the previous research concerning the Italian market: Cervellati et al . () find mean ARs equal to about 1 per cent for the upgrades and to −0.92 per cent for the downgrades; Belcredi et al . () estimate 0.90 and −1.29 per cent, respectively.…”

“…As for the recommendation revisions, the frequency of the downgrades is higher than that of the upgrades. This is consistent with the phenomenon known as the ‘optimism bias’ of financial analysts (O'Brien, ; Cervellati et al ., ; Ramnath et al ., ), claiming that analysts tend to be excessively optimistic in their initial forecasts before gradually revising their recommendations. Revisions took place especially after 2008, which is probably explained by the higher market volatility driven by the international financial crisis.…”

“…Cervellati et al . () consider reports issued from the 1 January 1998 till the 31 December 2003 on all the companies listed in the Italian Stock Exchange and analyse only the impact of recommendations revisions. They find average abnormal returns (AARs) of 0.67 per cent for upgrades and −0.74 per cent for downgrades at the report date.…”

The Impact of Blog Recommendations on Security Prices and Trading Volumes

“…Two recent studies focus on analyst recommendations in the Italian Stock Market; Belcredi, Bozzi and Rigamonti (2003) and Cervellati, Della Bina and. Pattitoni, (2006) both find significant market reactions in both prices and trading volumes to changes in analyst recommendations.…”