Put your money where your mouth is: Do financial firms follow their own recommendations?

In this paper, we explore how US financial firms trade relative to their own equity analyst recommendations. In the quarter-of and that immediately followa recommendation, firm trades are significantly positively related to recommendation changes. This relation is robust to controls for sub-sample effects, return/momentum related phenomena, size effects, controls for consensus recommendation, and other data normalizations. Our results show that financial firm trades are consistent with their analysts' research and recommendations, despite recent conjecture to the contrary. (C) 2009 The Board of Trustees of the University of Illinois. Published by Elsevier B.V. All rights reserved.