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Primary Article

Is It Prudent to Trade Around Analyst Recommendation Changes?

An Analysis of Transactions Costs

Amber Anand, S. G. Badrinath, Sugato Chakravarty and Robert A. Wood
The Journal of Trading Fall 2006, 1 (4) 22-37; DOI: https://doi.org/10.3905/jot.2006.654299
Amber Anand
An assistant professor in the Department of Finance at the College of Business Administration, University of Central Florida in Orlando, FL.
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  • For correspondence: aanand@bus.ucf.edu
S. G. Badrinath
A professor in the Department of Finance in San Diego State University in San Diego, CA.
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  • For correspondence: sbadrina@mail.sdsu.edu
Sugato Chakravarty
A professor of consumer sciences and management at Purdue University in West Lafayette, IN.
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  • For correspondence: sugato@purdue.edu
Robert A. Wood
A professor of finance at Fogelman College of Business & Economics at the University of Memphis in Memphis, TN.
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  • For correspondence: rawood@pobox.com
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Abstract

In the wake of an increased emphasis on managing transactions costs, we investigate if the period surrounding analyst recommendation changes is appropriate for trading from the point of view of incurring lower transactional costs. We pick analyst recommendation changes because they are a highly frequent corporate event and it behooves a buy-side trader to know exactly how to react to such events. Using a sample of analyst recommendation changes made on all stocks trading in the NYSE and AMEX over an 18-month period, we find that public announcements of analyst recommendation changes are accompanied by a decrease in transaction costs over a period of 10 days surrounding the event. Our finding is surprisingly robust to the quality of the analyst, strength of the signal, size of the firm and level of institutional ownership in the firm. These results indicate that analyst recommendation changes (or news of impending recommendation changes) provide opportunities to institutional traders to execute large orders without increasing the costs of such executions.

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The Journal of Trading
Vol. 1, Issue 4
Fall 2006
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Is It Prudent to Trade Around Analyst Recommendation Changes?
Amber Anand, S. G. Badrinath, Sugato Chakravarty, Robert A. Wood
The Journal of Trading Sep 2006, 1 (4) 22-37; DOI: 10.3905/jot.2006.654299

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Is It Prudent to Trade Around Analyst Recommendation Changes?
Amber Anand, S. G. Badrinath, Sugato Chakravarty, Robert A. Wood
The Journal of Trading Sep 2006, 1 (4) 22-37; DOI: 10.3905/jot.2006.654299
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