Hostname: page-component-78c5997874-j824f Total loading time: 0 Render date: 2024-11-15T06:27:26.099Z Has data issue: false hasContentIssue false
  • English
  • Français

Market Structure, Informed Trading, and Analysts' Recommendations

Published online by Cambridge University Press:  06 April 2009

Sok Tae Kim ,
Ji-Chai Lin  and
Myron B. Slovin
Sok Tae Kim
Affiliation:
Dongsuh Securities Co., LTD, Seoul 150-010, Korea
Ji-Chai Lin
Affiliation:
Department of Finance, Louisiana State University, Baton Rouge, LA 70803
Myron B. Slovin
Affiliation:
Department of Finance, Louisiana State University, Baton Rouge, LA 70803
Get access Rights & Permissions [Opens in a new window]

Abstract

We examine stock price behavior in response to initial coverage, buy recommendations that are pre-released to important clients before the stock market opens, and find a strong positive valuation effect at the open. On average, it takes five minutes of trading for NYSE/AMEX stocks and 15 minutes for NASDAQ stocks to reflect the private information contained in these analyst recommendations, so when informational asymmetry is high, the centralized call market is more efficient than a competitive, but fragmented dealer market. Public news release leaves share prices unaltered. Overall, competition among informed traders causes private information to be rapidly incorporated into stock prices.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 32 , Issue 4 , December 1997 , pp. 507 - 524
Copyright
Copyright © School of Business Administration, University of Washington 1997

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Amihud, Y., and Mendelson, H.. “Trading Mechanism and Stock Returns: An Empirical Investigation.” Journal of Finance, 42 (07 1987), 533–553.CrossRefGoogle Scholar
Atiase, R. “Predisclosure Information, Firm Capitalization, and Security Price Behavior around Earnings Announcements.” Journal of Accounting Research, 23 (Spring 1985), 21–36.Google Scholar
Barber, B., and Loeffler, D.. “The ‘Dartboard’ Column: Second-Hand Information and Price Pressure.” Journal of Financial and Quantitative Analysis, 28 (06 1993), 273–284.CrossRefGoogle Scholar
Barclay, M., and Litzenberger, R.. “Announcement Effects of New Equity Issues and the Use of Intraday Data.” Journal of Financial Economics, 21 (05 1988), 71–99.Google Scholar
Benveniste, L.; Marcus, A.; and Wilhelm, W.. “What's Special about the Specialist?” Journal of Financial Economics, 32 (08 1992), 61–86.CrossRefGoogle Scholar
Collins, D.; Kothari, S.; and Rayburn, J.. “Firm Size and Information Content with Respect to Earnings.” Journal of Accounting and Economics, 9 (07 1987), 111–138.Google Scholar
Freeman, R. “The Association between Accounting Earnings and Security Returns for Large and Small Firms.” Journal of Accounting and Economics, 9 (07 1987), 195–228.Google Scholar
Gammill, J. “The Organization of Financial Markets: Competitive Versus Cooperative Market Mechanisms.” Working Paper, Harvard Business School (1992).Google Scholar
Glosten, L. “Insider Trading, Liquidity, and the Role of the Monopolist Specialist.” Journal of Business, 62 (04 1989), 211–236.Google Scholar
Grossman, S., and Stiglitz, J.. “On the Impossibility of Informationally Efficient Markets.” American Economic Review, 70 (06 1980), 393–408.Google Scholar
Harris, F.; McInish, T.; Shoesmith, G.; and Wood, R.. “Cointegration, Error Correction, and Price Discovery on Informationally Linked Security Markets.” Journal of Financial and Quantitative Analysis, 30 (12 1995), 563–579.Google Scholar
Harris, L. “A Transaction Data Study of Weekly and Intradaily Patterns in Stock Returns.” Journal of Financial Economics, 16 (05 1986), 99–117.CrossRefGoogle Scholar
Holden, C., and Subrahmanyam, A.. “Long Lived Private Information and Imperfect Competition.” Journal of Finance, 47 (03 1992), 247–270.Google Scholar
Kyle, A. “Continuous Auctions and Insider Trading.” Econometrica, 53 (11 1985), 1315–1335.Google Scholar
Leach, J., and Madhavan, A.. “Price Experimentation and Security Market Structure.” Review of Financial Studies, 6 (Summer 1993), 375–404.CrossRefGoogle Scholar
Liu, P.; Smith, S.; and Syed, A.. “Stock Price Reactions to Wall Street Journal Securities Recommendations.” Journal of Financial and Quantitative Analysis, 25 (09 1990), 399–410.Google Scholar
Madhavan, A. “Trading Mechanisms in Securities Markets.” Journal of Finance, 47 (06 1992), 607–642.CrossRefGoogle Scholar
Patell, J., and Wolfson, M.. “The Intraday Speed of Adjustment of Stock Prices to Earnings and Dividend Announcements.” Journal of Financial Economics, 13 (06 1984), 223–252.Google Scholar
Stoll, H., and Whaley, R.. “Stock Market Structure and Volatility.” Review of Financial Studies, 3 (Spring 1990), 37–71.Google Scholar
Womack, K. “Do Brokerage Analysts' Recommendations Have Investment Value?” Journal of Finance, 51 (03 1996), 137–167.CrossRefGoogle Scholar
Wood, R.; McInish, T.; and Ord, J.. “An Investigation of Transaction Data for NYSE Stocks.” Journal of Finance, 40 (07 1985), 723–741.Google Scholar