Analyst Stock Ownership and Stock Recommendations

• In Event: Analyst Incentive

Abstract

The practice of analyst stock ownership is widespread on Wall Street yet there is little research on its economic consequences. We hand-collect a large sample of analyst research reports to examine the capital market impact of analyst stock ownership. We find that the stock recommendations of analysts with stock ownership are significantly more optimistic than those with no such ownership. Furthermore, we show that there is a significantly stronger market reaction to the “buy” and “hold” recommendations of ownership analysts compared to the same recommendations of non-ownership analysts. We also document a stronger reaction to the upgrade and downgrade recommendations of analysts who own shares compared to analysts who do not own shares. These findings indicate that investors perceive the research of ownership analysts to be more informative and more useful than the research of non-ownership analysts. Our results have important implications for regulators who need to assess the effectiveness of the requirement for analysts to fully disclose whether they maintain a financial interest in the securities they cover.

Authors

• Elio Alfonso, Florida International University

• Stephen Wen-Jen Lin, Florida International University

• Yong Yu, The University of Texas at Austin