“Wall $treet Week”: Information or Entertainment?

Abstract

The purpose of the study we report was to determine the information content of the recommendations made by panelists during 1997 on “Wall $treet Week with Louis Rukeyser.” Using event-study methodology for the short term, we found a statistically significant positive abnormal return of 0.65 percent for the recommendations on the first trading day after the show on Friday. To determine the abnormal long-term (one- and two-year) average holding-period returns, we used two matching processes. Using industry and size matching, we found not only that the portfolio of recommended stocks improved in value during the following eight quarters but that its increase in value was higher than for the matched sample in all eight quarters and statistically significantly higher in half of the eight quarters. Using industry, size, and book-to-market matching, we found similar results. Overall, this study's results suggest that the panelist recommendations have significant information content.

The purpose of the study reported in this article was to determine the information content of the recommendations made by panelists on “Wall $treet Week with Louis Rukeyser” (WSW) during 1997. Could investors have profited by using the recommendations on the show? If they could not, then the show might be viewed as primarily—or solely—entertainment, not informative in the sense of allowing investors to achieve positive excess returns.

In the past, three articles have focused on the performance of the analysts on WSW. Generally, these studies found an information effect on the first trading day after the show. We found similar results for the first trading day after the show. When the same three studies examined the results for longer periods, the results were mixed.

We extended these studies by using a more recent sample, examining a longer performance time frame (i.e., quarterly results up to two years), and using a more appropriate methodology. The earlier studies used cumulative abnormal returns based on event studies in which a market model, such as an equally weighted index, was used as a benchmark. We used a different methodology because previous research has documented that cumulative abnormal returns are biased predictors of buy-and-hold abnormal returns and that significant biases arise in t-statistics when long-run abnormal returns are calculated with the use of a reference market index. The methodology found to be effective in long-run event studies, and the methodology we used, is to match sample companies to control companies of similar size and similar ratios of book value to market value. This approach yields well-specified t-statistics in virtually all sampling situations that have been considered.

To examine the long-term value of the recommendations, we followed two matching processes. We set out to determine the average holding-period abnormal returns each quarter up to eight quarters. The results of the method when we matched by industry and size indicate that the portfolio of stocks recommended by WSW panelists not only improved in value during the eight quarters after the announcement but that the increase in value was higher than the matched sample in all eight quarters and statistically significantly higher in four quarters. We found similar results when we used the method of industry, size, and book-to-market (ISBM) matching. Generally, the average holding-period abnormal returns after the first day of trading after the show were about 9 percent for one year and about 16 percent for two years.

We also analyzed the value of individual panelists' recommendations by using both matching methods. When we used the ISBM method, we found that 5 of the 41 special guest panelists on the show in 1997 made positive recommendations that produced two-year postrecommendation abnormal holding-period returns of more than 100 percent.

These results suggest that the recommendations made on the show for the sample period were more than entertainment and had significant information content. Moreover, although we did not specifically investigate the issue of potential bias in analysts' recommendations created by conflicts of interest, these results indicate that the analysts' recommendations in our sample were followed by strong long-run positive price reactions and would have had value for those who followed them.

We wish to thank Minna Leinonen for data-collection assistance.