The Impacts of Korean Domestic and Foreign Analysts' Reports on the Korean Stock Market

Abstract

This paper empirically studies the impacts of both foreign and Korean domestic analysts' reports on stock prices. The first major finding is that when Korean and foreign analysts revise target stock prices upward, stock prices increase, whereas downward revisions negatively affect stock prices. We found similar results for revisions in stock recommendations. Second, there is no significant difference between the two impacts. However, in the case of upward revisions of target prices, Korean analysts had a greater influence than foreign analysts during the pre-announcement period. Third, even before the event date, stock prices continued to rise or fall depending upon upward or downward revisions in target prices. After the event date, however, there were no significant stock price changes. We interpret this result as implying that stock prices had already incorporated the information before the announcement, so there seems to have been an information leakage. When they revised stock recommendations, changes in stock prices were concentrated during a few days around the event date. Fourth, when foreign analysts revise target prices upwards, foreign investors continue to buy stocks. In contrast, when foreign analysts revise target prices downwards, there are no prior changes in the foreign investment position. However, when stock prices fall enough, foreigners may also subsequently earn abnormal returns by buying underpriced stocks. Fifth, when foreign analysts revise stock recommendations upward, foreign investors may earn abnormal returns by buying stocks before the announcement. It is strange, however, that foreigners continue to buy stocks even when there are negative revisions and stock prices fall.