Predictability of Analyst Stock Recommendation Revisions

On average, analysts’ stock recommendation revisions have immediate effects on stock prices. However, recent research suggests that only a small subset of recommendations are influential in the sense that they are associated with significant short-window returns. We attempt to reconcile these findings by examining the predictability of recommendation revisions. Because analysts experience frictions in frequently revising recommendations, we predict that analysts signal future revisions through changes in the tone and quantitative forecasts of sequential reiteration reports, possibly preempting market reactions to subsequent revisions. Indeed, future recommendation revisions are positively associated with the signed change in analyst report tone, the level of forecasted returns, and target price revisions. We identify reiteration recommendations but with reports that imply future revisions and show they are significantly positively associated with short-term market reactions. Upgrades preceded by implied revisions are associated with attenuated market reactions and a lower likelihood of being classified as influential, consistent with investors preempting returns to the subsequent upgrades. Our model is better at predicting upgrades than downgrades and has performance commensurate with prediction models in other settings.