On Efficiency Contribution of Analyst Recommendations to Financial Markets

This paper examines the fundamental role of security analysts as information intermediaries using recent advances in the realized variance literature. We construct a signal-to-noise volatility ratio to capture the efficiency contribution of analysts' recommendations while controlling for noise in price data. We find that only analysts' revisions with a greater efficiency contribution generate significant stock price reactions in the directions expected by the analysts. Revisions with a greater efficiency contribution increase informed trading in the options market and reduce not only the uncertainty about covered firms but also the extreme jump risks in their stock prices