Analysts recommendations

Market model

As there is no clear evidence that the release of analysts’ initial reports have a signifi-cant impact on companies participating in the incentive scheme, we further examine the participating companies by breaking the group into their respective recommendations given by the analysts. Out of 55 companies in the participating group, 29 companies received buy recommendations and 26 hold recommendations. We compare the CAR be-tween groups of companies with buy and hold recommendations where the control group remains unchanged as the reference group.

Similar with the previous results, the abnormal returns on the event day for the buy recommendations is 0.112% (t-test= 0.381), while the abnormal return for the hold rec-ommendations is −0.320% (t-test= −0.782). Both statistics are not statistically different from zero. It means that the abnormal returns on the event day for both the buy and hold recommendations are not significant, which is an indication that the analyst rec-ommendation is not an influential event. Figure 6.6 shows the pattern of CARs between the buy and hold recommendations with the control group as the reference. The CAR is calculated using the event window [-120,120] based on the market model as in Equa-tion (5.13).

Among the three groups, the magnitude of CAR in the buy recommendations’ group is the highest, and the hold recommendations’ group is the lowest. The buy recommen-dations’ group has statistically significant positive CARs between day −94 to 14. On the other hand, the hold recommendations’ group has statistically significant negative CARs for most of the days after the event day. The difference of CARs between the buy and hold recommendations is compared using the method we mentioned earlier in Section 6.6.2. The differences are statistically significant from zero in most of the window from day −108 to day 85. It means that the abnormal returns in the buy recommendations’

group are significantly higher than the hold recommendations group.

Although there seems like a building-up of positive CARs nearly 100 trading days before the event day in the buy recommendation’ group, we have shown earlier that there

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Figure 6.6: CAR market model - buy, hold & control group

is no conclusive evidence that there is any leakage of the recommendations or insider trading prior to the event that could contribute to the positive CARs. This is because there are other important events that had occurred during the event window more than 30 days before the day such as the release of the quarterly results. A good quarterly results in the buy recommendations’ group might contribute to the positive CARs. Moreover, the positive CARs in the buy recommendations’ group start to reverse from day −30 onwards. It means that the positive CAR is not sustainable enough that it could not establish a significant link with the arrival of new information in the analysts reports.

We further replicate our investigation and examine the movement of CARs for the buy and hold recommendations using a shorter event window [−30, 30] based on the market model of abnormal return. The shorter event window [−30, 30] shows a different pattern of CARs for all groups. In contrast, the magnitude of CAR in companies with buy recommendations is no longer substantially bigger than the hold recommendations or the control group. In fact, there is no clear pattern that one CAR is superior to the others as shown in Figure 6.7.

The results show that the negative CARs in both the buy and hold recommendations

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Days relative to event

CAR

Buy Hold Control

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Figure 6.7: CAR market model - buy, hold & control group (shorter window) are statistically significant for most of the days after the event day. As shown in Figure 6.7, despite the negative CAR, companies with buy recommendations have higher CAR for most of the days after the event day. However, the test statistics show that the difference of CARs between the buy and the hold recommendation are not statistically significant from zero in the entire window [−30, 30]. It means that the abnormal returns in the buy and hold recommendations are equal based on a shorter event window.

Since there is no sign of building-up of positive CARs in the shorter event window [−30, 30] in the buy or hold recommendations’ group, the significant positive CAR for the buy recommendations’ group in the longer event window [−120, 120] is due to the other events that occurred earlier than the release of analysts’ recommendations. This result is consistent with the earlier results in Section 6.6.1, and therefore it confirms that there is no leakage of analysts recommendations or insider trading prior to the release of the recommendations. Table A.4 in Appendix A.6 depicts the abnormal returns for the buy and hold recommendations.

In summary, the findings using the market model of event study suggest that the release of the analysts’ initial reports and their accompanying recommendations is not a

significant nor an informative event. It means that the analyst report is not judged as an important document that investors can benefit from. Even the analysts’ favourable recommendations do not have any significant positive effects on returns. It is an indication that the release of the analysts’ initial reports is not really an event. The study finds that there is no evidence that there is any leaking of information from the analysts reports or their recommendations. The presence of insider trading prior to the release of the analysts’ initial reports is also not supported.

Market-adjusted return

We replicate the analysis using the market-adjusted model as in Equation (6.4) and calculate the CAR for each group as shown in Figure 6.8. Focusing on the event day, the results are similar with the previous ones. The abnormal return on the event day for the buy recommendations’ group is 0.006%. The t-test statistics is 0.019, the standardised t-test statistics is 0.083 and the rank test statistics is 0.511, which means that all the test statistics on the event day t=0 for the buy recommendation are not significantly different from zero. The abnormal return for the hold recommendations is −0.383%.

The t-test statistics is −0.90, the standardised t-test statistics is −1.198, and the rank statistics is −0.938. It means that the abnormal return on the event day, t=0, for the hold recommendation is also not significantly different from zero. The insignificance of abnormal return on the event day means that the analyst recommendation either the buy or hold is not really an important event.

The negative CARs in the event window [−120, 120] for the buy and hold recommen-dations as well as the control group are significant from zero for most of the times in the event window. Even though the magnitude of CAR is significant, it is meaningless because the direction of CAR is going downtrend. It means that the analysts’ recom-mendations are not capable of generating positive returns. Essentially, there is no sign of growing build-up of positive CAR prior to the recommendations and therefore there is no sign that there is any leaking of analysts recommendations or insider trading prior to the recommendations.

We further replicate the investigation using a shorter event window [−30, 30] and

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Figure 6.8: CAR market-adjusted model - buy, hold & control group

similar results still prevail. Essentially, we find that there is no sign of growing build-up of positive CAR prior to the event and therefore there is no evidence of leaking of information or insider trading. The direction of CARs is going downtrend and therefore has negative values.

Event study using the market-adjusted return model shows that the analyst recom-mendation is not a significant event that could have significant impact on returns. Since the analyst recommendation is not judged as an important document, the model does not find that there is a growing build-up of CAR that could suggest the presence of insider trading or information leaking prior to the event.

In summary, there is not enough evidence to show that there is any significant growing build-up of positive CAR in the buy or hold recommendations’ companies prior to the release of analysts recommendations using two models of event study either in the long or short event window. Therefore there is no evidence that there is any leaking of analysts recommendations or insider trading from the recommendations. Furthermore, we have examined the event window [−30, 30] and found that there is no other major corporate events during the event window that could affect the results. The insignificance results

are consistent with the earlier ones which means that the building-up of positive CAR in the event window [−120, 120] prior to the event is due to other events and is not due to the analysts recommendations. Consistent with our previous results, the analysts recommendation is not a significant or influential event that contained useful information to investors since the abnormal return on the event day is not significantly different from zero. Therefore the release of the analysts recommendations is not really an informative event.