Investor sentiment, stock returns, and analyst recommendation changes: The KOSPI stock market

By analysing daily data on the KOSPI stock market, we examine how investor sentiment and stock market returns respond to announcements of changes in analysts’ recommendations. In addition, we examine the effect of these announcements on the relationship between investor sentiment and stock returns. We find that investor sentiment is more sensitive to upgrade announcements than it is to downgrade announcements, implying that analyst reports yield meaningful trading indications to uninformed investors. Furthermore, investor sentiment becomes pessimistic prior to bad news being released, significantly affecting the response of stock returns to downgrade announcements. Thus, investor sentiment is one possible cause of asymmetric stock market reactions to changes in analysts’ recommendations.