Academic journal article Quarterly Journal of Business and Economics

The Impact of Barron's Recommendations on Stock Prices

Academic journal article Quarterly Journal of Business and Economics

The Impact of Barron's Recommendations on Stock Prices

Article excerpt


The term second-hand information refers to information that has been collected from public sources and manipulated or simply reported again by a public news source. Prior research documents the existence of abnormal returns upon the announcement of secondhand information in the form of analysts' recommendations published in a variety of business periodicals. These abnormal returns generally are found to be short-lived. Explanations of the abnormal returns associated with second-hand information include the fact that the market may be inefficient; that second-hand information increases attention focused on the company; that it increases the volume of trading, putting price pressure on the company's stock; and that it provides new information about the company's future prospects or reduces uncertainty associated with previous reports about the company.

The objective of this study is to provide additional evidence on the impact of secondhand information on stock prices. We examine a source of information heretofore untested in the finance literature: stock purchase recommendations contained in the widely read weekly business periodical Barron's. The different sources of information in Barron's allow us to examine additional explanations of the impact of second-hand information. We also explore the impact of firm size on the stock price reaction to the disclosure of second-hand information.

The results provide additional evidence that second-hand information has an impact on stock prices. Consistent with prior studies of other sources of second-hand information, the results show that Barron's recommendations have a substantial impact on stock prices but that the results do not persist into the future. We also find an inverse relationship between firm size and the abnormal returns associated with the second-hand information.


Several prior studies document the impact of second-hand information on securities prices. Groth, Lewellen, Schlarbaum, and Lease (1979) find positive abnormal returns associated with brokerage house recommendations. Bjerring, Lakonishok, and Vermaelen (1983) find positive abnormal returns associated with Canadian brokerage house recommendations. Davies and Canes (1978) and Liu, Smith, and Syed (1990) find positive abnormal returns around buy recommendations in the "Heard on the Street" column in the Wall Street Journal and negative abnormal returns around the column's sell recommendations. Copeland and Mayers (1982) and Stickel (1985) find positive abnormal returns around Value Line ranking changes. Glascock, Henderson, and Martin (1986) find positive abnormal returns associated with Heinz Biel's Forbes recommendations. Pari (1987) finds abnormal returns around guest recommendations made on the program Wall Street Week. Barber and Loeffler (1993) find evidence of positive abnormal returns associated with stock picks disclosed in the "Dartboard" column of the Wall Street Journal.(1)

The announcement period abnormal returns documented in these studies range from 0.66 percent to 3.53 percent. Studies that examine returns over longer post-announcement periods generally find that the abnormal returns diminish. For example, Barber and Loeffler (1993) and Davies and Canes (1978) find that about half of the initial stock price response is reversed within 25 trading days. Pari (1987) finds that six and twelve month holding period returns are below the market return and excess returns are negative for the recommended stocks over these periods.

There is no clear explanation why analysts' recommendations and the dissemination of second-hand information impact stock prices, but several alternatives have been offered. Copeland and Mayers (1982) interpret their Value Line findings as evidence against semi-strong form market efficiency. Grinblatt, Masulis, and Titman (1984) offer the attention hypothesis as a possible explanation of the abnormal returns associated with stock dividends and splits. …

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