Title

Analysts' qualitative statements and the profitability of favorable investment recommendations

Department

School of Accountancy

Document Type

Article

Publication Date

2-1-2017

Abstract

In this study, we examine the relation between sell-side analysts' justifications and favorable rating profitability. Using a novel text analysis methodology, we transform analysts' qualitative statements into a content-based text signal. Our results indicate that information contained in analysts' justifications is indeed associated with favorable recommendation profitability, controlling for information in the quantitative summary measures. We also develop trading strategies using our text signal and find that using the text signal generates economically significant returns. Importantly, to increase our understanding of factors associated with favorable rating quality, we disaggregate the text signal into five discrete information categories. Results show that references to historical financial and nonfinancial performance measures contain significant predictive power. Our findings have important implications for investors and financial analysts.

Journal

Accounting, Organizations and Society

Volume

57

First Page

33

Last Page

51

Digital Object Identifier (DOI)

10.1016/j.aos.2017.03.005

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