Which Analysts Lead the Herd in Stock Recommendations?

Abstract

This article identifies a leader-follower relationship in stock recommendations and documents the characteristics of lead analysts. We develop a metric for identifying lead analysts based on the observation that lead analysts have directed a ''path'' for the consensus in the past year. We find that recommendations are more likely to direct a path for the consensus when they are issued by lead analysts, accompanied by concurrent earnings forecast in the same direction from the same analysts, away from the consensus, followed by price momentum, issued on large and high growth firms, and issued by analysts from large brokers with less frequent recommendations. This result still holds even after controlling for public information, excluding news announcement dates, Regulation Fair Disclosure legislation, and other robustness checks. Empirical analysis shows that there is a greater market reaction to the recommendations of lead analysts than others. Keywords herd, lead, stock recommendations, analystIn this research, we look at the leading-herding behavior of equity analysts. There is an extensive literature on whether analysts herd and which analysts herd. However, there is sparse research on which analysts lead the herd in stock recommendations. This is surprising given the view that identifying lead analysts is important for investors in deciding which analysts to listen to, given that analysts' stock recommendations have investment value. 1 In this article, we fill this gap by providing a method of identifying lead analysts in stock recommendations. We further examine which analysts are more likely to lead and whether lead analysts' recommendations cause greater market reaction.Research (Cooper, Day, & Lewis, 2001) has so far examined which analysts lead the herd in terms of earnings forecasts. However, given the differences between earnings forecasts and stock recommendations, it is important to identify lead analysts using stock recommendations. First, in addition to earnings, analysts need other information to generate Downloaded from stock recommendations. For example, analysts estimate the discount rate when using discount dividend models and benchmark price-earnings (PE) ratios when using price comparables. Second, some analysts use price patterns rather than earnings to generate stock recommendations. Lo and Hasanhodzic (2009) interview leading practitioners of technical analysis and reveal that some analysts make recommendations on patterns in the recent history of prices. Academic researchers (e.g., Altinkilic & Hansen, 2009;Jegadeesh, Kim, Krische, & Lee, 2004) also confirm that analysts often follow a momentum strategy. Third, some analysts make stock recommendations, but do not issue earnings forecasts, making it impossible to judge recommendations based on forecast ability. Loh and Stulz (2011) find that only half the analysts contemporaneously revise earnings when they issue stock recommendations. Jegadeesh and Kim (2010) find that even within the subsample of contemporaneous revisions, only half the...

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