Stock Price Reactions to The Wall Street Journal's Securities Recommendations

This paper examines the impact of the "Heard-on-the-Street" (HOTS) column of The Wall Street Journal on common stock prices. The results of the study indicate that the HOTS column appears to have an impact on stock prices on the publication day; however, we also find a smaller, but statistically significant, impact on two days preceding the pub? lication. The significant abnormal returns on these days are associated with higher trading volume. The reaction of stock prices is symmetric with respect to the buy and sell recom? mendations, and the impact of single-company recommendations is greater than the im? pact of the multi-company recommendations. I. Introduction The efficient market hypothesis assumes that security prices fully and instantaneously reflect all available information. Considerable evidence has been accumulated during the past decades in support of the hypothesis. The acceptance of the hypothesis has raised questions about the economic value of professional investment advice. If the market is efficient, then the management of port? folios based on these recommendations should not consistently outperform the market. Why, then, are investors still willing to pay for this information? Examples of the advice include low-cost financial publications, brokerage house rec? ommendations, and subscription financial newsletters that sell for hundreds of dollars. Recent studies argue that investment advisors can provide information to investors at a lower cost than the investors' cost of information production. Millon and Thakor (1985) develop a model that explains the existence of investment advisory agencies. They argue that if the information of investment advisory agencies permits security analysts to share information about common uncertainties that affect the value of firms as a whole (such as the return on the market portfolio), then investment advisory agencies can produce information more cheaply than individual investors. This model is consistent with the study of