After Hours

Based on research by K. Ramesh, Edward Xuejun Li, MinShen and Joanna Shuang Wu

View the cartoon here: Roller Coaster

• Analysts’ revisions offer authentically new information.
• Analysts’ revisions don’t duplicate corporate news. More than 50 percent of these revisions offer information contrary to recent firm news.
• After-hours revisions are more common and provide even more new information than regular-hours revisions.

Issued on the heels of company news releases, analysts’ stock recommendations are often dismissed as repackaged PR. In-house forecasts, skeptics say, exist only to peddle a brokerage house’s other services. Yet the houses themselves spend real money in court defending their analysts’ copyrights. The reports, the houses insist, add value. It turns out that the houses are right.

A new study co-authored by K. Ramesh, a professor at Rice Business, reveals that analysts do not simply rehash the company line: They not only help investors with stock valuation by issuing confirming revisions, but also reverse prevailing market beliefs by issuing contrary revisions.

In the past, academic research yielded mixed results on the topic. Researchers typically focused on daily stock market reaction to analysts’ recommendations, which often are released around corporate news, and tended to overlook analyst revisions that were released after hours. Both methods blurred the picture. They made it difficult to parse the effects of stock recommendations versus corporate news and drew an incomplete conclusion of information contained in analyst revisions.

To correct these distortions, Ramesh and his co-authors used fine-grained, intra-day data that separate stock market reactions to company news releases from reactions to analyst revisions. They then compared how much new information each source provided. Although the timing of analysts’ revisions often coincided with that of news releases, the movement of stock prices showed that investors did indeed value the analysts’ information.

Intriguingly, the authors also found a striking difference in the content of revisions published during regular trading hours and revisions that came out after hours. Exploiting this previously ignored area, Ramesh and his co-authors showed that the number of revisions released after regular trading hours was much greater than the number during regular trading hours. The spike reflected a greater demand for the information from the institutional investors that dominate after-hours trading. These after-hours revisions, the researchers found, also carried more information than revisions published during regular trading hours.

If analyst revisions were simply repackaged corporate news, you would expect them to be positive when firm news was positive and negative when it went sour. However, Ramesh and his co-authors found, only 28 percent of revisions actually dovetailed with the corporate news they followed. These revisions, moreover, actually offered more information than did the corporate releases. The rest of the time analysts either made recommendations independently or issued revisions contrary to firm news releases.

Contrary to skeptics’ complaints, in other words, the study’s findings strongly suggest that analysts not only don’t rehash the corporate line — they give investors new and useful information. But the skeptics may still be right about something: The new findings don’t indicate that analysts’ revisions are necessarily correct. They simply offer authentically new information. Investing is still risky business, even when the analysts do their part to inform.

K. Ramesh is the Herbert S. Autrey Professor of Accounting at Jones Graduate School of Business at Rice University. 

To learn more, please, see: Li, E. X., Ramesh, K., Shen, M., & Wu, J. S. (2015). Do analyst stock recommendations piggyback on recent corporate news? An analysis of regular-hour and after-hours revisions. Journal of Accounting Research, 53(4), 821-861.