Never judge a book by its cover: what security analysts have to say beyond recommendations

Our study analyzes market reaction to the entire content of a large sample of analysts’ reports from the period 2002 to 2004 for the German market. In particular, we explore whether the three summary measures in the reports, i.e., recommendation revisions, earnings forecast revisions, and target price forecast revisions are acknowledged by the market. Additionally, we investigate if stated justifications in the written text of analysts’ reports contain information value beyond the three summary measures. We find that earnings forecast revisions and target price forecast revisions contain valuable information, both unconditionally and conditional on the rest of the information in the report. Our findings also reveal that justifications made by analysts are of high salience to market participants. These justifications provide valuable information, both unconditionally and conditional on all other types of information in a report. Our findings also suggest that business ties between banks and the analyzed companies do not affect market reaction to dissemination of an analysts’ report.

Andreas Walter (Corresponding author)Email: