Trading before Analysts' Recommendation Revisions: An Empirical Research on Margin Trading and Short Selling

Abstract

Abstract: This paper focuses on margin trading and short selling prior to public announcement of analysts' recommendation revisions, and shows that there is abnormal trading before analysts' recommendation revisions. To be specific, abnormal levels of margin trading increase in the short window before analyst upgrades, but abnormal short selling volume is not significantly related to analyst downgrades. Further study shows that when the margin trading and short selling volume of brokerage firm is larger, the relationship between pre-announcement abnormal margin trading and analyst upgrades is more significant. Also, star analysts do not mitigate the abnormal margin trading, and when there are more analyst upgrades on the same day, the pre-announcement trading phenomenon is more severe. This paper provides new evidence for conflict of interests between analysts and institutions, and shows that margin trading and short selling market is still at the primary stage in China.

Key words: analysts, recommendation revisions, pre-announcement trading, margin trading and short selling

Cao Xinwei, Zeng Xu, Hong Jianqiao. Trading before Analysts' Recommendation Revisions: An Empirical Research on Margin Trading and Short Selling[J]. Management Review, 2020, 32(12): 49-60.

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