Effects of ambiguity in market reaction to changes in stock recommendations

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This study uses analyst recommendations and three ambiguity proxies, namely ambiguity in fundamentals, ambiguity in information and market ambiguity, to examine market reaction to recommendation changes in the Taiwanese stock market. The authors find that analysts’ recommendation changes have positive effects on subsequent buy-and-hold abnormal returns when market ambiguity is moderate. When ambiguity in fundamentals is low, recommendation changes have a positive influence on smaller firms. The effect of ambiguity in information on stock returns is associated with market ambiguity; market ambiguity is negatively associated with abnormal returns for firms with moderate ambiguity in fundamentals. Investors in a small firm rely more on analyst recommendations.

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    • Table 1. Features of recommendation changes
    • Table 2. Basic statistics
    • Table 3. Ambiguity and two-day buy-and-hold abnormal returns
    • Table 4. Ambiguity and BHARs: controlling for ambiguity
    • Table 5. Ambiguity and BHARs: controlling for both ambiguity and characteristics
    • Table 6. The effects of ambiguity in information and market ambiguity on BHARs under different levels of ambiguity in fundamentals
    • Table 7. The effects of ambiguity in fundamentals and ambiguity in information and on BHARs under different levels of market ambiguity