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Table III Continued

p-values of Tests of Equality of Regression Coefficients

All Observations (Column 1)

Recommendation Revision (Columns 2-4)

Target Price Revision

(Columns 5-7)

1 = 2 = 3

b(Upgrade) = b(Downgrade) = b(Reiteration) b(Upgrade) = b(Reiteration) b(Downgrade) = b(Reiteration) g(Upgrade) = g(Downgrade) = g(Reiteration) g(Upgrade) = g(Reiteration) g(Downgrade) = g(Reiteration) a1(Positive) = a1(Negative) = a1(Zero) a2 (Positive) = a2 (Negative) = a2(Zero) a3(Positive) = a3(Negative) = a3(Zero) b(Positive) = b(Negative) = b(Zero) g(Positive) = g(Negative)


0.619 0.948 0.327 0.000 0.000 0.000

0.000 0.000 0.000 0.382 0.001

of i

3 о то

one standard deviation increase in DTP/P increases the event-day abnormal return by 0.783 * 3.705 = 2.9 percent, on average. Moreover, it can be seen that revisions in both earnings forecasts and stock recommendations are informative as well. The positive and significant coefficient on DF/P indicates that the information in the earnings forecast revisions is not completely subsumed by either the target price revisions or the stock recommendations. The coei-cients a1, a2,and a3 and their expected ordering (a2 < a3 < a1) provide evidence that these recommendation revisions are incrementally informative. We easily reject the joint hypothesis that these parameters are equal with an F test (p-

value< 0.0001).

The regression results provide interesting evidence regarding the role that target prices and earnings forecast revisions play in the case of recommendation reiterations. Earlier work (e.g., Barber et al. (2001)) has shown that recommendation reiterations are the least informative, as is evident in the economically small magnitude of the intercept associated with recommendation reiterations (a3 = 0.375, t-statistic = 12.1). In such reiterations, it appears that investors rely mostly on the information conveyed by the target prices and the earnings forecast revisions.13

Next, we investigate whether the regression resultsFand, in particular, the conclusions regarding the role of target price revisions-are sensitive to the type of recommendation and target price revisions. For example, when controlling for the information in earnings forecast revisions, is the market response to target price revisions similar when recommendations are upgraded, reiterated, or downgraded? Or, is the market response similar after positive and negative target price revisions? Toward this end, we conduct two more sets of regressions. In the first, we condition on the direction of the recommendation revision (columns 2 - 4), whereas in the second we condition on the sign of the target price revision (columns 5 -7).

Consider irst the regression results when we condition on the type of recommendation revision (upgrades, downgrades, and reiterations). It can be seen that target price revisions are associated with larger abnormal returns when analysts issue recommendation downgrades (g = 8.094, t-statistic = 18.1) relative to either reiterations or upgrades. Indeed, the coefficient g associated with recommendation downgrades is signiicantly larger than the one associated with recommendation upgrades or reiterations. The asymmetric reaction is consistent with the view that, given analysts reluctance to issue unfavorable recommendation

13 In additional analysis, we estimate separate regressions similar to the one in column 1 for each recommendation reiteration category. While the coeicient estimates on the price target and earnings forecast revision are signiicant and in the expected sign, the intercept estimate (i.e., the average abnormal return), while economically small, is significant and positive for both strong buy and buy reiterations and is signiicant and negative only for hold reiterations. This inding suggests that the positive coeicient on recommendation reiterations in column 1 of Panel A is driven primarily by events in which recommendation reiterations were either strong buy or buy. Further evidence on the role of recommendation revisions is given in the Appendix.

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