Relationship between the Projections and Recommendations of Equity Analysts and the Behavior of Fund Managers in an Emerging Market

Abstract

The purpose of this study is to assess whether the analysts’ activity is valuable for investors, i. e., whether the managers follow the analysts’ forecasts and whether those who follow are able to achieve higher returns. We analyzed the behavior of investment fund managers in the Brazilian market based on a sample involving the quarterly composition of the portfolio of investment funds classified as Active, Indexed, Free Portfolio and Segmented, from the third quarter of 2009 to the first quarter of 2014. We used data that include the quarterly revisions of the recommendations, projections of earnings per share (EPS), and implied return issued by analysts. The results indicate that the funds that trade according to the revisions seem to follow the EPS revisions more than the other two. No evidence was found indicating that active funds use analysts’ information as a strategy to achieve higher returns. Furthermore, it can be noted that the differing opinions of the analysts seem to negatively influence the managers’ behavior, that is, the more disagreement, the less the manager tends to follow the consensus of the revisions, specifically those of EPS and implied return. Although managers also tend to follow the analysts’ recommendation, are the revisions of projections, when followed, that seem to generate positive returns for trades. Lastly, the results indicate that analysts who tend to disclose only recommendations are likely to cause adverse effects to investors. Fund managers who do not use the quantitative projections (EPS or implied returns) tend to lose money.