Stock Prices and the Publication of Second-Hand Information

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Stock Prices and the Publication of Second-Hand Information Author(s): Peter Lloyd Davies and Michael Canes Reviewed work(s): Source: The Journal of Business, Vol. 51, No. 1 (Jan., 1978), pp. 43-56 Published by: The University of Chicago Press Stable URL: http://www.jstor.org/stable/2352617 . Accessed: 25/02/2013 12:03 Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at . http://www.jstor.org/page/info/about/policies/terms.jsp

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Peter Lloyd Davies*
University of Rochester

Michael Canes*
American Petroleum Institute

Stock Prices and the Publicationof Second-Hand Information
Introduction Considerable evidence has accumulated over the past 10 years suggesting that the stock market adjusts in an efficient manner to the arrival of new information. Claims by technical analysts that excess returns may be earned by studying price movements have found little support in studies by Fama and Blume (1966), Jensen and Benington (1970), and others.' Investigations of price movements accompanying economic events (e.g., Ball and Brown [1968] on earnings announcements, Fama et al. [1969] on stock splits) likewise have offered little hope that trading based on these announcements will be profitable. Perhaps most significantly, the gross returns earned by professional portfolio managers do not appear to be higher, given the risk level, than the returns from a naive strategy of buying and holding the market portfolio (see, e.g., Sharpe 1966; Jensen 1968, 1969). Some economists have expressed satisfaction with these results on grounds that efficiently determined stock prices give better signals for resource allocation than prices that do not reflect * We gratefully acknowledge the assistance of Myron Scholes of the University of Chicago, who provided us with the daily return data used in our computations. 1. A certain amount of short-lived positive serial correlation seems to exist in daily returns but not enough to power a trading strategy. (Journal of Business, 1978, vol. 51, no. 1)

This paper presents evidence on the effects of secondary dissemination of stock analysts' recommendations after primary dissemination to analysts' clients. The evidence suggests that such secondary dissemination significantly affects stock prices and that the effect is not reversed within the subsequent 20 trading days. One inference is that stock analysts provide economically valuable information to clients, and a second is that primary dissemination of such information does not always bring about a full stock-price adjustment, contrary to the claims of the strong form of the efficient market hypothesis.

? 1978 by The University of Chicago
0021-9398/78/5101-0006$01.16 43

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44

Journal of Business

available information. Others are perplexed, however, at an implied inefficiency-namely, the existence of the security-analysis industry. If prices reflect all information that analysts are examining, why then are investors willing to pay for their services? There are several possible answers. One is that analysts' recommendations are based on inside information that is not yet reflected in prices. This leaves unexplained the apparent lack of consistent superior performance by professionally...
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