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August 30, 2004
brokerage clients have an information advantage?
A few years ago, Clifton Green, assistant professor
of finance at Goizueta Business School, collaborated on a paper with
fellow professor Jeffrey Busse in which they studied the effects
of CNBC news anchor Maria Bartiromo’s comments on stock prices.
Among other findings, they determined that when Bartiromo made a favorable comment
about a company—
vis-á-vis an analyst recommendation during her “Midday Call” spot—its
share price jumped an average of 60 points within a minute: 11 points in the
first 15 seconds, 20 in the next 15 seconds and 12 points in the remaining 30
Green’s keen interest in the impact of analysts’ reports on the stock
market continues, but now he’s focusing on the brokerage firm institutional-investor
client, investigating the value of analyst research to such clients by studying
the short-term profitability associated with early access to recommendation changes.
Research analysts at investment banks (like Goldman Sachs and Merrill Lynch)
spend considerable time working on research reports. Most of them release their
findings to their customers outside market hours, according to Green. The clients,
including investment firms and mutual funds, will come to the office in the morning,
sift through the information they saw the night before and decide whether it’s
important enough to warrant a trade. They buy or sell based on what they read.
This exclusive access to information is often fleeting, however, as word-of-mouth
In a study titled “The Value of Client Access to Analyst Recommendations,” Green
asks: Does this short-lived informational advantage provide clients with investment
“Most research on analyst reports looks at longer-term strategies after
the recommendations are publicly available,” said Green, whose work was
detailed in an April 26 Barron’s Market Week column. “But it occurred
to us that brokerage firm clients, who have access to recommendations before
they are released to the public, might have a useful short-term informational
Green studied intraday trade and quote data for Nasdaq-listed stocks, an examination
of 7,000 recommendation changes from 16 major brokerage firms between 1999 and
The findings suggest that brokerage clients act on their informational advantage,
and recommendation changes do provide brokerage clients with incremental investment
value. After controlling for transaction costs, Green wrote, purchasing quickly
following upgrade recommendations resulted in an average two-day return of 1.02
percent, whereas selling short following downgrades produced a return of 1.5
In sum, immediately buying stocks on upgrades and selling them short on downgrades
produced annualized excess returns of 30 percent after trading costs. All the
gains would have come by the time the ratings shifts were made public by newswires
“There are lots of clients out there for these banks, so word does spread
a fair amount before the market opens,” Green said. “When the market
opens and the analysts have upgraded a stock, saying they like it more than they
used to, on average the price will go up 4 percent or so before anyone can trade.
Clients do not get access to that 4 percent because prices are already higher
through the word-of-mouth channels.
“However,” he continued, “I found the price continues to drift
up by another 1–2 percent over the next couple of days as the news spreads
more widely. That’s the part a client gets access to. If the stock market
earns 10 percent a year, and I tell you that you can earn 1 percent in two days,
that starts to aggregate to a pretty big number.”
While Green’s research has important implications for gains by institutional
investors, stock market players should take away another message, particularly
about the value of analyst stock upgrades and downgrades.
“Critics of analysts have focused on analysts’ optimism; they generally
say ‘buy’ way too often,” Green said.
“This study shows
that whenever analysts change their opinion, that information is still useful.
It’s important to focus more on changes of opinion, rather than the average
level of opinion. Rather than just identifying the stocks analysts are most bullish
on, we should be looking at which stocks on which they have become increasingly
bullish in the past several months.”
This article first appeared in Knowledge@Emory and
is reprinted with permission.