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Conclusion

There are probably more experts, real and self-proclaimed, in the investment business than in any other. They write columns for the financial press, appear on television and write books on how to get rich quickly. Investors follow their advice, content in the belief that these experts know more than they do and are therefore less likely to make mistakes.

Expert status can come either from access to better information than is available to other investors or to better processing (models, indicators, etc.) of the same information that others possess. Insiders at firms—top managers and directors—should be able to lay claim to the information advantage, and the evidence suggests that they are able to use it to advantage. Stocks with significant insider buying are much more likely to go up than are stocks with substantial insider selling. The time lag between insider trading and reporting makes it more difficult for individual investors to replicate their success. Analysts affect stock prices when they make recommendations on which stocks to buy and which to sell and when they revise estimates of how much these firms will earn in the next quarter. In either case, the bulk of the reaction occurs on the recommendation/revision but there is evidence of a price drift after the announcement. In other words, prices tend to continue to increase in the days or weeks after a buy recommendation or an upward revision in earnings. Analysts with more investor following and credibility have a bigger price impact than less followed analysts with clear conflicts of interest.


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