Stock Recommendations Research Articles

Could crowdsourced financial analysis replace the equity research by investment banks?

Equity research is gaining popularity in crowd-sourced information sharing platforms. This study analyses S&P 100 companies stock recommendations and user-contributed articles published on Seeking Alpha platform over a three-year period; and investigates whether investment banks’ rating consensus or the sentiment of single-ticker articles published by Seeking Alpha contributors can predict future abnormal returns more accurately. We find that both analyst groups underperform the market. Trading strategies based on the sentiment of the opinion articles perform worse than trading strategies designed around the recommendations of security analysts. Analyst recommendations are expected to remain relevant, there is no immediate pressure from crowd-sourced equity research for changing the business model.

Strategic-Temporal Framing As Impression Management: Managing Investment Analysts’ Temporal Focus

Board independence and firm performance are of utmost importance to investment analysts who play a key role in determining stakeholders’ judgments of a firm. Researchers have paid less attention to impression management tactics used in communicating firm performance to analysts. A key tenet of previous research on impression management is that leaders can rely on uncertainty stemming from information asymmetry to manage targets’ impression of various organizational attributes. However, given the power and the good information access of investment analysts, and the visibility of firm performance, information asymmetry proves less helpful in managing analysts’ impression. The present paper builds on the premise that uncertainty can stem from temporal distance between the evaluation decision and the evaluation subject. It proposes a novel theory of temporal impression management, which involves strategic distorting of impression management targets’ temporal focus. Hypotheses are developed and tested using a hand- collected dataset. It is found that when firms perform better (worse) than expectations, leaders reduce (increase) the attention of investment analysts to the past (future) because positive (negative) events are more discounted under a past (future) focus. Moreover, temporal impression management mediates the relationship between firm performance and analysts’ recommendations, making the stock recommendations more favorable.

The CEO who Cried Wolf

Despite the prevalence of deception in everyday life, there are a paucity of articles examining the impact executive deception may have on firm level outcomes. Furthermore, scholars have yet to examine how the use of deception over time may change its related outcomes. The current study investigates both long-term and short- term effects of executive deception on stock recommendations provided by financial analysts. The result suggest that well preforming firms may obtain higher analysts’ recommendations when they use deception, however these positive effects dissipate over time and may even hurt the firm.

Jim Cramer’s Mad Money Charitable Trust Performance and Factor Attribution

This article analyzes the complete historical performance of Jim Cramer’s Action Alerts PLUS portfolio from 2001 through 2017, which includes many of the stock recommendations made on Cramer’s TV show, Mad Money . Both since inception of the portfolio and since the start of Mad Money in 2005 (when the portfolio was converted into a charitable trust), Cramer’s portfolio has underperformed the S&P 500 total return index both on an overall returns basis and in Sharpe ratio. Being the first to analyze Cramer’s post-crisis return history, these findings contrast with previous studies, which analyzed Cramer’s outperformance in short windows before the 2008 financial crisis. Using factor analysis, we find that Cramer’s portfolio returns are primarily driven by underleveraged exposure to market returns and, in some specifications, tilting toward small-cap stocks, growth stocks, and stocks with poor earnings quality.

Friends in Need Are Friends Indeed: An Analysis of Social Ties between Financial Analysts and Mutual Fund Managers

ABSTRACT We examine how hometown, school, and workplace ties between financial analysts and mutual fund managers affect their business decisions. We show that a fund manager is more likely to hold stocks covered by analysts with whom she is socially connected, and that she also makes higher profits from these holdings. Such social tie-related holding returns are higher among more opaque firms. In return, a fund manager tends to cast her star analyst votes in favor of her connected analysts, and her fund company is more likely to allocate trading commissions to her connected analysts' brokerages. Additional tests indicate that analysts more actively acquire information (through conducting corporate site visits) and issue more optimistically biased recommendations for stocks held by fund managers with whom they are connected. Overall, our results illustrate the pronounced influence of social networks on the behaviors of analysts and fund managers. JEL Classifications: G10; G23; M40. Data Availability: Data are available from the public sources cited in the text.

How Do Institutional Investors Interact With Sell-Side Analysts?

This paper examines how institutional investors interact with sell-side analysts (hereafter, SSAs) in Korean stock market. In particular, we examine the role of institutional investors as a more sophisticated mechanism which incorporates sell-side analysts’ stock recommendation, target price, and earnings forecast more rapidly than individual investors do. Moreover, we examine whether institutional investors differentiate the quality of sell-side analysts’ information. By using a sample of 1,421 firm-year observations in Korean stock market during 2001–2011, we find that the change of institutional investor’s ownership has a significantly positive association with the level of equity value estimates based on SSAs’ earnings forecasts relative to stock prices and their stock recommendation which are considered as SSAs’ indicator of stock market’s mispricing. In addition, we find that only when SSAs provide more accurate earnings forecasts, institutional investors incorporate SSA’s information into their stock trading. Thus, we conclude that institutional investors in Korean stock market contribute to the enhancement of stock market efficiency by incorporating SSAs’ information into their stock trading more rapidly than individual investors. Our findings add to the literature by shedding a light on the unobserved interaction among more sophisticated stock market participants, such as institutional investors and sell-side analysts.

Cultural Biases in Equity Analysis

A more positive cultural trust bias by an equity analyst's country of origin toward a firm's headquarter country is associated with significantly more positive stock recommendations. The cultural bias effect is stronger for eponymous firms whose names mention their home country and varies over time, increasing with negative sentiment. I find evidence of a negative North-South bias during the European debt crisis and UK-Europe divergence amid Brexit. Share price reactions to recommendations by more biased analysts are weaker, and more biased recommendations are worse at predicting monthly stock returns. More positively biased analysts also assign higher target prices.

Trafność rekomendacji analityków giełdowych w polskim sektorze bankowym – perspektywa wahań koniunkturalnych

The paper aims at empirical evaluation of the impact of the market cycle on the performance of stock recommendations issued for the banks listed on the Warsaw Stock Exchange over the period 2000–2016. The research methods involved analyses of correlation and regression. The accuracy of each recommendation was assessed over 180 days since the date of its issuance. The examined sample covered 2801 recommendations and 347 121 observations of stock prices for 14 listed banks. The results of the research indicate that market cycle exerts impact on both directions and accuracy of analysts’ recommendations. The recommendations issued in the examined period were generally counteracting the extreme market sentiments, serving for stabilisation of banks’ stock prices around the intrinsic values estimated by analysts. The accuracy of target prices increased in the periods of bull market, and decreased in the periods of downturns.

Capital Market Anomalies and Quantitative Research

Quantitative research analysts (Quants) produce in-depth quantitative and econometric modeling of market anomalies to assist sell-side analysts and institutional clients with stock selection strategies. Quants are associated with more efficient analyst forecasting behavior on anomaly predictors — stock recommendations and target prices on anomaly-longs (anomaly-shorts) are more (less) favorable and investment value of analyst research is higher. Quant research facilitates “smart money” trades of institutional clients on anomaly stocks — the likelihood of purchasing underpriced (overpriced) stocks unconditionally and in response to inflows is higher (lower) for client funds. Finally, we provide evidence that, all else equal, cross-sectional return predictability of anomaly long-short strategies is attenuated for stocks with increased Quant coverage. The evidence is consistent with the interpretation that Quants add value to financial markets, and consequently, increase market efficiency with respect to anomaly predictors.

Government Incentives and Financial Intermediaries: The Case of Chinese Sell-Side Analysts

We examine how government ownership in brokerage firms influences analyst research quality in the Chinese context. When the government has strong incentives to prop up market prices, analysts from brokerages with significant government shareholdings (government-brokerage analysts) issued relatively less pessimistic (or more optimistic) earnings forecasts and revisions and more favorable stock recommendations; they were also slower to revise. Although less accurate than those issued by other brokerages, these forecasts significantly influenced investors' beliefs. During regular times, government-brokerage analysts issued relatively less optimistic (more pessimistic) earnings forecasts and revisions and less favorable stock recommendations; they were also quicker to revise and no less accurate than those by other brokerages. Government-brokerage analysts thus balance market credibility against government incentives. In doing so, they serve both market advisory and stabilization functions. We show that their market stabilization function also operates during times of high investor sentiment.

The impact of aggregate uncertainty on herding in analysts' stock recommendations

This study examines whether aggregate uncertainty affects the herding tendency among analysts. The results show that, in addition to market risk and firm-level uncertainty, analysts' tendency to herd increases with aggregate uncertainty. These results are robust with respect to excluding common and earnings information, as well as using different measurements of consensus recommendation, risk and aggregate uncertainty. Herding among analysts is stronger when downgrading a stock. The tendency of herding clearly increases in tandem with aggregate uncertainty. The results are more prevalent for small stocks and inexperienced analysts.

A novel stock recommendation system using Guba sentiment analysis

Investment recommendation has been one of the hottest topics in the finance area which can help investors to get more profits and to avoid loss. Existing recommendation systems mostly depend on ana...

Investment recommendation by discovering high-quality opinions in investor based social networks

Investor based social networks, such as StockTwist, are gaining increasing popularity. These sites allow users to post their investment opinions in the form of microblogs. Given the growth of the posted data, a significant and challenging research problem is how to utilize the personal wisdom and different viewpoints in these opinions to help investment. A typical way is to aggregate sentiments related to stocks and generates buy or hold recommendations for stocks obtaining favorable votes while suggesting sell or short actions for stocks with negative votes. However, considering the fact that there always exist unreasonable or misleading posts, sentiment aggregation should be improved to be robust to noise. In our work, we study how to estimate qualities of investment opinions in investor based social networks. To predict the quality of an investment opinion, we use multiple categories of factors generated from the author information, opinion content and the characteristics of stocks to which the opinion refers. With predicted qualities of investment opinions, we perform two types of investment recommendation. The first is recommending high-quality opinions to users and the second is recommending portfolios generated by sentiment aggregation in a quality-sensitive manner. Experimental results on real datasets demonstrate the effectiveness of our work in recommending high-quality investment opinions and profitable portfolios.

Evaluation Markers and Mitigators in Analyst Reports in Light of Market Response to Stock Recommendations

Professionals and individuals who invest in equity markets rely on financial analysts’ recommendations and reports to decide on what to invest in and when to trade. This study examines the role of two groups of communication strategies, evaluation markers and mitigators, in establishing analysts’ credibility. The sample consists of 80 reports written in Polish for companies listed on the Warsaw Stock Exchange in Poland. In this emerging market setting, where credibility is challenged by uncertainty, analysts deploy various strategies depending on the recommendation they make: “buy,” “hold,” or “sell” shares. The findings point toward a specific group of mitigators, namely subjectivization, as a means of communicating expert opinion. Regression results reveal that investors’ reaction to the publication of a recommendation to “hold” or “sell” shares, measured based on the changes in share prices, is stronger when subjectivization is used in a report. The findings carry implications for research into analyst behavior and for the development of professional writing skills.

Hardening Soft Information: Analyst Conservative Bias

In this paper, we examine whether sell-side financial analysts show a bias when translating their soft information into a hard format. Sell-side analysts produce both soft research output, in the form of a textual report, and hard research output, including earnings forecasts, target prices, and stock recommendations. In our study, we find evidence that analysts’ hard outputs undershoot the neutral implication of their own soft output. Furthermore, our cross-sectional results show that our observed conservative bias increases when the underlying information signals are of poorer quality, which we measure by the forecast horizon, linguistic cues in the report, and characteristics of the firms’ information environments. Consistent with the well-known analyst optimism, we find that hard outputs assimilate analysts’ soft output more conservatively when their soft output conveys bad news. Our findings suggest that the fundamental distinctions between soft and hard information lead to a predicable bias when analysts harden their soft information.

The effect of 52 week highs and lows on analyst stock recommendations

AbstractIn this study, I examine whether analysts use the 52 week high and low as reference prices for recommendation revisions. My results show that the proximity and recency of the 52 week high increase the odds of stocks being upgraded. When analysts upgrade a stock whose 52 week high occurred in the distant past, they provide more valuable information to investors than that based on the proximity ratio of the 52 week high. More‐experienced analysts provide more valuable recommendations when they upgrade (downgrade) based on either the nearness or recency of the 52 week high (low) than less‐experienced analysts do.

Can Investors Profit from Information Diversity?

There is heterogeneity in individual forecasts of any variable — inflation, corporate earnings, etc. The standard consensus estimate takes a simple average of individual forecasts, implicitly treating each forecast as a common signal plus noise. If some individuals know more than others, then a consensus estimate is not necessarily the optimal way to combine forecasts. I show how a recently developed statistical technique can infer overlap in information across agents and I apply it to stock recommendations of sell-side analysts. I find a trading strategy that delivers an alpha of 2-3% on an annualized basis, net of transaction costs, suggesting that information diversity is prevalent, economically significant, and tradable.

Evaluating the performance of the Motley Fool’s Stock Advisor™

Since March 2002, The Motley Fool’s founders, David Gardner and Tom Gardner, have published monthly stock recommendations under Motley Fool’s premium Stock Advisor service. In this paper, the authors investigate whether analysts’ recommendations can add value for investors by examining the performance of portfolios constructed based on Motley Fool’s recommendations. They evaluate the announcement effect on share price corresponding to the publication of stock recommendations. Additionally, the researchers examine holding period returns for a portfolio imitating the actions of Stock Advisor. They find portfolios composed of recommendations through Stock Advisor added value initially upon recommendation and across extended holding periods. Additionally, the authors find that the Stock Advisor sample outperforms other sample portfolios on a risk-adjusted basis and over several subperiods. The findings contribute to the literature on the usefulness of analysts’ recommendations in adding value to investors’ portfolios.

Are analyst stock recommendation revisions more informative in the post‐IFRS period?

AbstractThis paper investigates whether the mandatory IFRS adoption has affected the informativeness of analyst recommendation revisions in Europe. Although prior studies document that IFRS adoption improved analyst forecast attributes, the impact of IFRS cannot be completely assessed without examining how the market reacts to information‐rich events in an environment with enhanced disclosure. To examine this question we utilize a difference‐in‐differences design using as main control sample firms that had voluntarily adopted IFRS before the EU's mandated switch. Overall, our evidence suggests that after the mandatory adoption of IFRS, both analyst upgrades and downgrades are more informative. These results hold after controlling for a number of variables that capture analyst, firm and information environment characteristics and are robust to a number of sensitivity analyses including the use of a US control sample. Finally, we examine whether our results are sensitive to the level of accounting enforcement. We find that analyst downgrades are more informative in the post‐IFRS period for firms in both high and low enforcement environments. Analyst upgrades, however, are more informative only if they are issued for firms in high enforcement countries.

Hype My Stock: Do Firms Really Want Biased Research?

Analyst research is alleged to be biased because of conflicts of interest when analysts’ employers underwrite securities for the firms covered. I posit that affiliated analyst optimism should be the strongest for offering firms with a desire to over-inflate stock prices. I hypothesize that a firm’s corporate governance and its CEO incentives are related to the affiliation bias. Using stock recommendations data, I find evidence that the affiliation bias is indeed more pervasive for firms with high CEO wealth sensitivity to stock price (i.e., high CEO delta). The larger affiliation bias for high delta firms remains even after the introduction of regulatory reforms aimed at limiting analyst optimism. There is mixed evidence that firms with poorer corporate governance have more serious analyst affiliation biases. Examining event reactions to recommendations, I find that the market does not sufficiently discount the fact that affiliated analyst optimism is more serious for some firms. I also show post-offering evidence suggestive of quid quo pro in that hyping banks win more future deals for high delta firms while the firm’s CEO makes more insider stock sales.