MARKET REACTIONS TOWARDS ANALYSTS' RECOMMENDATIONS IN EMERGING MARKETS: EVIDENCE FROM MALAYSIA

Abstract

This study empirically examines the value of analysts' recommendations concerning the Malaysian stock market. Analyzing a sample of 1163 analysts' recommendation announcements spanning 2010 to 2018, it is shown that stock prices respond considerably to analysts' upgrade and downgrade recommendations. This study applies event study methodology to investigate price reactions by estimating abnormal returns using the market model. Utilizing daily data, this study reveals statistically significant price increases following recommendation upgrades and price declines in response to recommendation downgrades with downgrade effects being more pronounced than upgrade effects. Additionally, the market's reaction to changes in recommendations results in considerable price drifts lasting up to six months following the recommendations. These findings indicate that analysts' recommendations provide valuable information in identifying mispriced stocks in the Malaysian stock market. The implication is that investors could rely on the analysts’ informational edge to make informed investment decisions.