The Korean Journal of Economic Studies
The Impact of Analyst Recommendation Changes on the Korean Financial Market and Sentiment
Karam Kim (Korea Asset Pricing), Heejin Yang (Dongguk University Gyeongju Campus) and Doojin Ryu (Sungkyunkwan University)Year 2020Vol. 68No. 3
This study examines the effect of analyst recommendation changes on investor sentiment, stock returns, and trading behaviors of investors, and further investigates the sentimental effect regarding the reactions of the stock market and investors to analyst recommendation changes. Event study approach discovers that investor sentiment, stock returns, and net order imbalance all significantly react to analyst recommendation changes.Moreover, we find that the reaction varies by investor type, as the net order imbalance of domestic individual investors more significantly reacts to upgrades of analyst recommendations, while that of domestic institutional investors and stock returns more significantly react to downgrades. The cross-sectional regression, employed to examine whether investor sentiment contributes to such asymmetric responses, shows that investor sentiment significantly affects the reaction of the stock market to analyst recommendation changes, when analyst reports downgrade, the reactions of stock returns and individual investors’ net order imbalance to recommendation. These results imply that investor sentiment has a role in determining the reaction of the stock market to analyst recommendation changes.