The Impacts of Foreign Analysts' Recommendations on Taiwan's Stock Market

This paper investigates both the information contents of recommendations disseminated by foreign security firms and the interaction of foreign security firms’ trading activities with their recommendations in Taiwan’s stock market. Using event study, correlation test, and regression analysis, we find negative average abcdrmal returns(AARs) and average cumulative abcdrmal returns(CARs) for negative and neutral foreign analysts’ recommendations levels and recommendation changes in the pre-recommendation period. AARs and CARs for positive recommendations in pre-recommendation period are positive, but reverse to negative three days after the event day. Our results also show that correlation coefficients of recommendations (both in recommendation levels and recommendation changes) and holding period returns are significantly positive in the pre-recommendation period, but insignificantly negative in the post-recommendation period. In the regression analyses, we find that price momentum factor is significantly related to foreign analysts’ recommendation, but the incremental contribution of this factor to foreign analysts’ recommendations are marginal and not significant. We also find that foreign security firms respond more rigorously to stocks receiving recommendation above buy recommendations and stocks being downgraded. These results show that foreign security firms are more conservative toward trading stocks in Taiwan’s stock market. They only buy stocks above buy recommendations (in a delay pattern), but immediately sell downgraded stocks