Analysts and sentiment: A causality study

We analyze the role that financial analysts play in the sentiment effect on stock prices. Causality analysis reveals that sentiment affects various aspects of analysts' forecasts and recommendations. We show that experienced analysts are aware of sentiment, consciously incorporate it and have some control over its effect. As a result, the sentiment effect on analysts replicates the sentiment effect expected in stock prices and actual forecast errors are limited to certain cases. Analysts expedite the propagation of sentiment to stock prices and probably enhance the effect by influencing sophisticated investors, but they do not initiate or shape it. The new regulations, “Research Analysts and Research Reports” and “Communications with the Public”, imposed in 2002, have reduced over-optimism due to sentiment.