This study is to investigate the impacts of investment opinions changes made by analysts on stock prices. The investment opinions are subject to revisions of investment ratings and target prices (upgrade, downgrade). Out of 199,019 analysts’ reports published from 2008 to 2013 ? excluding reports on financial institutions ? 4,663 reports of the investment ratings revisions and 32,112 reports of target prices changes were taken for the investigation.
The event study was used as a methodology, analyzing Average Abnormal Return(AAR) and Cumulative Average Abnormal Return(CAAR) from ?2 days to +2 days of the event day, when an event refers to the date which prediction changes on investment ratings, target prices are announced. Furthermore, the study also includes analysis on impacts of prediction changes on stock prices by analysts from different sized Korean and non-Korean investment banks.
The results are as follows:-
Firstly, when analysts change predictions, a statistically meaningful AAR and CAAR are observed from all investment banks ? large, medium-small sized Korean investment banks as well as non-Korean investment banks.
Secondly, despite the same prediction change, the impacts on investment ratings revisions were more significant than that of target price changes.
Thirdly, the stock prices fluctuated the most on the event day. Large sized investment banks had the highest AAR, followed by medium-small sized investment banks and non-Korean investment banks.
Fourthly, the responses to stock prices resulted from investment opinion changes to‘downgrade’on the event day were both statistically meaningful and significant when compared to the responses from investment opinion changes to‘upgrade’.
Fifthly, the responses to stock prices before the event were more volatile than the responses observed after the event. The degree of information leakage was high for large investment banks, followed by medium-small sized investment banks and non-Korean investment banks.
Sixthly, there was a substantial difference in CAAR between (-2, 0) and (0, +2), which strongly proves there had been information leakage.
Seventhly, the impacts of changing investment opinions to ‘downgrade’ were statistically meaningful for Korean large sized investment banks and medium-small sized investment banks, but not for non-Korean investment banks.
Eighthly, the impacts of changing investment opinions to ‘upgrade’ or ‘downgrade’, the stock prices decreased sharply after the event occurred. But the results were not statistically meaningful enough for medium-small sized investment banks and non-Korean investment banks.
Lastly, the market adjusted AAR and CAAR for all investment banks were slightly higher than industry adjusted AAR and CAAR.