Are stock price dynamics affected by financial analysts recommendations? Evidence from Italian green energy stocks

In this paper we analyze whether financial analysts recommendations on trading strategies related to a given stock can influence its price dynamics. The recommendation for a given stock is an assessment based on the comparison between the estimated target price and its observed (current) market price. Such a comparison enables financial analysts to infer whether the market overestimate or underestimate the stock. The target price is the analyst expected stock price at 6 months/1 year time horizon and represents the reference point for externalization of a bullish or bearish outlook of the given stock. Together with the recommendation, the target price provides the core of financial analysts disclosure, since it is the result of the evaluation of the fair value of a given company. The assessment is mainly based on the methodology that best suits the operational context of the company, and reflects both the analysts ability to forecast and the quality of the information used to determine it. Each group of analysts uses different models and analysis techniques, so that very often from all the different published recommendations, sometimes in conflict with each other, it is not possible to deduce a consistent picture. In this paper, by means of Markov Switching Regression models, we test whether price changes in Italian green energy stocks are: (1) informative both unconditionally and conditionally on the type of recommendations, and (2) unbiased forecasts conveying information about future abnormal returns.