Limited Attention, Competing Information and Market Reaction to Recommendation
FANG Junxiong, WU Qiong, FU Qi
School of Management, Fudan University; School of Economics and Management, University of Hong Kong; School of Accountancy, Zhejiang University of Finance and Economics
Abstract:
Sell-side analysts play important roles as the information intermediaries in the capital market. Based on the theories of limited attention and information competition, our study examines whether the effects of attention distraction exist in market reaction to analyst recommendations. We find that the concentrated announcements of analyst recommendations cause investors to under-react to relevant recommendations, while market reaction is measured by both abnormal return and trading volume. In particular, the number of analysts' recommendations on other companies announced on the same day is negatively associated with the immediate market reaction to the announcement of the relevant recommendation, while positively associated with the post-recommendation announcement drift. And our results are robust after considering endogeneity issues. In addition, the distraction effect is stronger on firms that receive positive recommendations, compared with those receiving negative recommendations. Our cross-sectional tests show that the effects are more pronounced for companies with less institutional holders, more within-industry competition and less visibility.
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