The value of analysts' stock recommendation revisions: Analysts' information filtering from insider trading
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This study examines whether analysts are capable of filtering the information from insider trading activities to enhance the profitability of their stock recommendation revisions. I document greater trading profits on analysts’ Upgrade to Buy (Downgrade to Sell) when more net insider purchases (sales) precede the revisions. This suggests that analysts are able to exploit the information embedded in insider trades, elevating the quality of their recommendation revisions. I also find that the impact of insider trades on the recommendation revision profitability increases with the level of information asymmetry around firms, supporting the informational role of insider trades in improving the quality of analysts’ recommendations. Finally, I find a substantial increase in the informative impact of insider trades on the recommendation revision profitability after a series of regulation changes, including Regulation FD and Section 403 of SOX, which suggests insider trades serve as a more important information source for analysts after such regulations. Overall, my findings suggest that given insider trades observable to the public, analysts are able to refine the information revealed by insider trades, resulting in greater profitability of analysts’ recommendation revisions.