Investors' Use of Analysts' Recommendations

Abstract

This study examines the factors influencing the decisions of investors who use analysts' recommendations to arrive at a short-term decision to hold or to sell a stock. Specifically we examine if the presence of analysts' recommendations reduces the tendency for investors to commit the disposition error, i.e., sell winning stocks too soon and hold losing stocks too long. We also examine whether the strength of supporting arguments to the analysts' recommendations affects investor decisions. Our results indicate that the presence of an analyst summary recommendation report reduces the disposition error for gains but not for losses. A strong form of the analyst summary recommendation report, i.e., one with additional information supporting the analysts' position further, reduces the disposition error for gains and also reduces the disposition error for losses.