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Analysts, Industries, and Price Momentum

Published online by Cambridge University Press:  06 April 2009

Leslie Boni
Affiliation:
boni@unm.edu, University of New Mexico, Anderson Schools of Management, 1924 Las Lomas NE, Alburquerque, NM 87131
Kent L. Womack
Affiliation:
kent.womack@dartmouth.edu, Dartmouth College, Tuck School of Business at Dartmouth, Hanover, NH 03755.

Abstract

This paper examines the value of analysts as industry specialists. We show analysts create value in their recommendations mainly through their ability to rank stocks within industries. An industry-based recommendation strategy substantially improves the return to risk ratio and reduces price momentum tilt relative to portfolios that ignore industry information. An examination of the links among analyst information, aggregated at the industry level, and industry returns and industry momentum shows that industry returns precede industry-aggregated analyst upgrades and downgrades, and the short-term industry price momentum phenomenon is partly explained by returns of firms with more analyst coverage leading those with less in that industry. Recommendation information is not valuable for predicting future relative industry returns, however.

Type
Research Article
Copyright
Copyright © School of Business Administration, University of Washington 2006

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