Do financial analysts predict stock price crashes

Abstract

This study examines whether analysts' recommendations can predict stock price crashes, and whether this predictability is different during good and bad macroeconomic periods. Recent literature suggests that investors rely on analysts during bad times, when there more is a larger degree of uncertainty. We examine analysts' consensus recommendation changes prior to stock price crashes in recessionary economic conditions and in normal conditions. We examine a sample of 11,903 observations in the US stock market, from 1995 to 2013, collected from the Institutional Broker Estimation System (IBES) database. We employ a cross sectional regression methodology for this study. Using two different proxies of stock price crash, we find that analysts' downgrades are followed by a larger possibility of a crash in normal macro conditions, and a smaller possibility of a crash in unfavourable periods. Vffe use four different definitions for good and bad macroeconomic conditions. We find statistically significant evidence to suggest that analysts' recommendations are able to predict crashes m norma macroeconomic conditions, however we do not find empirical evidence for this notion during bad macroeconomic conditions.