What Are Analysts Really Good At?
Washington University in Saint Louis - John M. Olin Business School
Case Western Reserve University - Weatherhead School of Management
Singapore Management University; Singapore Management University - Lee Kong Chian School of Business
Ohio State University (OSU) - Fisher College of Business
May 1, 2012
AFA 2013 San Diego Meetings Paper
Sell-side analysts employ different benchmarks when defining their stock recommendations. For example, a ‘buy’ for some brokers means the stock is expected to outperform its peers in the same sector (“industry benchmarkers”), while for other brokers it means the stock is expected to outperform the market (“market benchmarkers”), or just some absolute return (“total benchmarkers”). We use these benchmarks to analyze the role of stock picking, industry picking and market timing in contributing to the performance of stock recommendations. We are able to do so given that different benchmarks suggest the use of different sets of abilities. Analysis of the relation between analysts’ recommendations and their long-term growth and earnings forecasts suggests that analysts indeed abide by their benchmarks. We find strong evidence that the investment value of stock recommendations stems from analysts picking winners and losers within a particular industry (stock picking) regardless of the declared benchmark. We find no evidence of either industry picking or market timing even for analysts whose benchmarks suggest the existence of such skills. The research carries implications for the correct understanding and interpretation of sell-side research and its investment value.
Number of Pages in PDF File: 54
Keywords: Analysts, Benchmarks, Stock Picking, Industry Picking, Market Timing
JEL Classification: G10, G24working papers series
Date posted: November 18, 2011 ; Last revised: November 14, 2013
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