We find that analysts who issue more accurate earnings forecasts also issue more profitable stock recommendations. The average factor-adjusted return associated with the recommendations of analysts in the highest accuracy quintile exceeds the return for analysts in the lowest accuracy quintile...

The gambler's fallacy (Rabin, 2002) predicts that trends bias investor expectations. Consistent with this prediction, we find that investors underreact to streaks of consecutive earnings surprises with the same sign. When the most recent earnings surprise extends a streak, post-earnings...

Analyst research is alleged to be biased because of conflicts of interest when analysts' employers underwrite securities for the firms covered. I posit that affiliated analyst optimism should be the strongest for offering firms with a desire to over-inflate stock prices. I hypothesize that a...

Investors' reaction to stock recommendations is often incomplete so that there is a predictable post-recommendation drift. I investigate investor inattention as a plausible explanation for this drift by using prior turnover as a proxy for attention. I find that low attention stocks react less to...

In bad times, uncertainty is high, so that investors find it more difficult to assess the prospects of the firms they invest in. Learning models suggest that in such times investors should, everything else equal, value informative signals such as analyst forecasts and recommendations more than...

We propose a simple methodology to evaluate a large number of potential explanations for the negative relation between idiosyncratic volatility and subsequent stock returns (the idiosyncratic volatility puzzle). We find that surprisingly many existing explanations explain less than 10% of the...

Investors' reaction to stock recommendations is often incomplete so that there is a predictable post-recommendation drift. I investigate whether investor inattention contributes to this drift by using turnover as a proxy for investor attention. I find that the recommendation drift of firms with...

We examine whether market-wide investor sentiment influences the stock price response to firm-specific news. We use the recently developed measure of investor sentiment by Baker and Wurgler (2006, 2007) and focus on the stock price response to earnings announcements. Our results indicate that...

We examine the relation between herding of mutual funds and dispersion of analysts' earnings forecasts to ascertain whether it is the lack of information or the arrival of correlated information that induces herding. Results show that the level of herding in individual stocks is positively...

Consistent with the industry practice of linking analyst compensation to their reputation, we find that large traders primarily follow the advice of star analysts and ignore the recommendations of non-star analysts. They buy (sell) stocks for which star analysts revise their recommendations...