The Shine of Star: The Effect of Star Analyst Title on Market Reaction

• In Event: M&A, Trading Volume, Analysts

Abstract

This paper studies investors’ reactions to the star-analyst designation, using a regression discontinuity design to control for financial analysts’ ability. We use a novel dataset that identifies analysts who barely won the star designation and their peers who barely missed it. We find that investors do react to the pure star title – on the trading day right after the award ceremony, the adjusted 2-day buy-and-hold cumulative abnormal return is 0.66% more for stocks with existing recommendations from analysts who barely won the star designation than those from analysts who barely missed it. However, this abnormal reaction to star-recommended stocks completely reverses within six weeks after the ceremony, which suggests that a “signaling” mechanism is not the main one underlying the effect. Rather, “attention-grabbing” seems to be the one at work – the abnormal reaction is mainly driven by analysts who won the star designation for the first time and stocks with low initial analyst coverage and market capitalization. We further document that informed traders appeared to have the list of finalists before the ceremony and traded in anticipation of the short-term market response to the award designation. A long-short portfolio exploiting the information on finalist ahead of time earns a return of 33 basis point over a 10-day holding period.

Authors

• Runjing Lu, University of California San Diego

• Siyu Chen, National University of Singapore