Market Responses to Analysts’ Recommendations and Information Weighting

We examine if the market responds differently to analysts’ stock recommendations when analysts put different weights on private information. Consistent with previous studies, we find that, on average, analysts tend to put larger than efficient weights on private information. We show that the market response to analysts’ recommendations is greater when they are made by analysts who put moderate weight on private information than when they are made by those who put over or underweight on private information. We also find that analysts who put moderate weight on private information provide the most accurate earnings forecasts. These results imply that investors value the private information released to the market through analysts’ recommendations and that the investment value of analyst recommendations, if any, results from both their ability to access private information and their ability to process and interpret publicly available information.