Stock Prices and the Publication of Second-Hand Information

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 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.