Analyzing the Analysts: When Do Recommendations Add Value?

Analyzing the Analysts: When Do Recommendations Add Value?

We show that analysts from sell-side firms generally recommend "glamour" (i.e., positive momentum, high growth, high volume, and relatively expensive) stocks. Naïve adherence to these recommendations can be costly, because the level of the consensus recommendation adds value only among sto...

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Bibliographic Details
Published in:The Journal of finance (New York) Vol. 59; no. 3; pp. 1083 - 1124
Main Authors: Jegadeesh, Narasimhan, Kim, Joonghyuk, Krische, Susan D., Lee, Charles M. C.
Format: Journal Article
Language:English
Published: 350 Main Street , Malden , MA 02148 , USA and 9600 Garsington Road , Oxford OX4 2DQ , UK Blackwell Publishing, Inc 01-06-2004
Blackwell Publishers
Blackwell Publishers Inc
Subjects:
Analysts
Analytical forecasting
Capital expenditures
Financial investments
Growth stocks
Investment analysis
Investment policy
Price momentum
Rates of return
Recommendations
Securities analysis
Statistical median
Stock analysis
Stock prices
Studies
United States > US
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Summary:We show that analysts from sell-side firms generally recommend "glamour" (i.e., positive momentum, high growth, high volume, and relatively expensive) stocks. Naïve adherence to these recommendations can be costly, because the level of the consensus recommendation adds value only among stocks with favorable quantitative characteristics (i.e., value stocks and positive momentum stocks). In fact, among stocks with unfavorable quantitative characteristics, higher consensus recommendations are associated with worse subsequent returns. In contrast, we find that the quarterly change in consensus recommendations is a robust return predictor that appears to contain information orthogonal to a large range of other predictive variables.
Bibliography:istex:7E08BD20CA1CC5BD73A607690609C1A996C9D6A3
ArticleID:JOFI657
ark:/67375/WNG-H7FW7DW5-Q
Jegadeesh is from Emory University; Kim is from Case Western Reserve University; Krische is from the University of Illinois at Urbana‐Champaign; and Lee is from Cornell University. This paper subsumes two earlier manuscripts titled “Stock Characteristics and Analyst Stock Recommendations” and “The Information Content of Analyst Stock Recommendations.” We have benefited from the comments of Bill Beaver; Louis Chan; Tom Dyckman; Wayne Ferson; Rick Green (the editor); Paul Irvine; Josef Lakonishok; Jay Ritter; Michael Weisbach; Kent Womack; an anonymous referee; and workshop participants at Case Western Reserve University, Cornell University, Dartmouth College, Emory University, Georgetown University, Rice University, and the Universities of California at Berkeley, Colorado, Illinois at Urbana‐Champaign, Pennsylvania, Rochester, and Southern California, as well as the 2002 AFA Annual Meetings, the AIMR Equity Valuation and Research Seminar, and the Prudential Securities Quantitative Research Conference. We would also like to thank Zacks Investment Research for providing the analyst recommendation data and I/B/E/S for providing the analyst earnings forecasts. First Call Corporation also provided us with recommendations data used in an earlier manuscript.
ISSN:0022-1082
1540-6261
DOI:10.1111/j.1540-6261.2004.00657.x