Sell side recommendations during booms and busts

Abstract

Our study documents that the information content and the information processing of stock recommendations differ fundamentally between expansions and recessions. The initial market reaction to all recommendations is stronger in recessions, but “Buy” recommendations do not have long-term investment value. We find that in recessions sell side analysts are too optimistic about the stocks they recommend to buy, while investors initially overreact to these recommended stocks. In expansions, no such contradicting pattern exists. We also document that analysts favor “glamour” over “value” stocks irrespective of the state of the economy.