Finance & Accounting Jun 5, 2007

Celebri­ty Ana­lyst Influ­ence on the Stock Market

Does the stock mar­ket react more strong­ly to earn­ings fore­casts issued by celebri­ty analysts?

Based on the research of

Sarah E. Bonner

Artur Hugon

Beverly Walther

There is no ques­tion the stock mar­ket has had its ups and downs, but have you ever won­dered what dri­ves peo­ple to pull their mon­ey out of or pour mon­ey into a com­pa­ny? Cer­tain­ly investors pay atten­tion to ana­lyst fore­casts, but to which ana­lysts are they pay­ing the clos­est atten­tion? Bev­er­ly Walther (Kel­logg School’s Depart­ment of Account­ing and Infor­ma­tion Man­age­ment), Sarah E. Bon­ner (Uni­ver­si­ty of South­ern Cal­i­for­nia) and Artur Hugon (Geor­gia State Uni­ver­si­ty) explored whether investors react stronger to celebri­ty” ana­lysts and why.

Past research has shown mass media can influ­ence people’s beliefs or behav­ior in gen­er­al. Such stud­ies are at least part­ly behind adver­tis­ers’ will­ing­ness to pay high­er rates to ensure their spots appear in pop­u­lar news­pa­pers and mag­a­zines and on air dur­ing time slots when the largest audi­ence is believed to be watch­ing or lis­ten­ing. Over the years, the media has devot­ed more and more atten­tion to the stock mar­ket and its key play­ers, such as ana­lysts. Recent research shows the media plays an impor­tant role both in the stock price for­ma­tion process and in account­ing set­tings. Such research, how­ev­er, focus­es pri­mar­i­ly on firms and not ana­lysts. Giv­en the analyst’s piv­otal role in incor­po­rat­ing account­ing infor­ma­tion into stock prices and the media’s role in dis­sem­i­nat­ing infor­ma­tion they issue, Walther and her co-authors want­ed to know how the media might also serve as an infor­ma­tion inter­me­di­ary for investors, specif­i­cal­ly with regard to high­er-vis­i­bil­i­ty celebri­ty ana­lysts and their earn­ings fore­cast revisions.

Giv­en the crit­i­cism recent­ly levied at finan­cial ana­lysts,” says Walther, we want­ed to inves­ti­gate how much of a fac­tor name recog­ni­tion plays in how investors react to the infor­ma­tion ana­lysts disseminate.”

Walther and her team found that stock prices react more strong­ly to earn­ings fore­cast revi­sions (the change in the analyst’s expec­ta­tions of the account­ing earn­ings num­ber the com­pa­ny will report in the upcom­ing quar­ter) issued by celebri­ty ana­lysts. They defined celebri­ty as a famous or well-pub­li­cized per­son, or in Daniel Boorstin’s (1962) words, some­one well known for his well-known­ness,” in addi­tion to per­for­mance-relat­ed qual­i­ties. Specif­i­cal­ly, the researchers select­ed a ran­dom sam­ple of ana­lysts and mea­sured celebri­ty by the amount of media cov­er­age an ana­lyst received between 1997 and 1999 in sources includ­ed in the Dow Jones Inter­ac­tive Database.

Walther and her co-authors want­ed to know if this stronger reac­tion occurred because celebri­ty ana­lysts were supe­ri­or per­form­ers or because their names were more rec­og­niz­able to investors. Walther says there was no com­pelling evi­dence that celebri­ty ana­lysts issued more accu­rate earn­ings fore­casts. More­over, although investors may react more strong­ly to these ana­lysts, there appears to be a price cor­rec­tion when the actu­al earn­ings are announced. If the price after the earn­ings fore­cast was too high or too low it is cor­rect­ed.” Sec­ond, they test­ed whether stronger reac­tions occurred because the earn­ings fore­cast itself had got­ten more media atten­tion, but there was no evi­dence to sup­port this alter­na­tive expla­na­tion. In the end, the researchers con­clud­ed the more an analyst’s name appeared in the media, the more like­ly investors were to pay attention.

The cen­tral fea­ture of this work is that in con­trast to my pri­or work, we exam­ine a char­ac­ter­is­tic of the ana­lyst — his/​her media cov­er­age — that is not sole­ly relat­ed to the per­for­mance of the ana­lyst,” says Walther. Unlike the pre­vi­ous find­ings in this area, our work sug­gests that a non-per­for­mance fac­tor can affect prices.”

While Walther’s find­ings may not per­tain to com­pa­nies per se, the find­ings are impor­tant for investors who may want to heed this advice: Don’t assume that just because an ana­lyst has got­ten more press that his or her fore­cast revi­sions are more accu­rate. Investors should also look at the his­tor­i­cal per­for­mance of the ana­lyst before decid­ing on whom to rely.”


Fur­ther read­ing:
Boorstin, Daniel J. (1962). The Image: A Guide to Pseu­do-Events in Amer­i­ca. New York: Ran­dom House, 25th edi­tion, 1987.

Featured Faculty

Beverly Walther

Professor of Accounting Information and Management, Department Chair of Accounting Information & Management

About the Writer

Written by Sherry Karabin, a freelance science and health writer living in New York City.

About the Research

Bonner, Sarah E., Artur Hugon and Beverly R. Walther (2007). “Investor Reaction to Celebrity Analysts: The Case of Earnings Forecast Revisions,” Journal of Accounting Research,” 45(3): 481-513.

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