The Effectiveness of Institutional Investors in Evaluating Analysts
54 Pages Posted: 3 Feb 2012
Date Written: February 1, 2012
Abstract
Using 1994-2009 data, we examine whether institutional investors are effective in evaluating analysts. All-American (AA) analysts elected by institutions through voting make buy and sell recommendations with up to 7% higher annualized risk-adjusted returns than other analysts. This performance differential exists both before and after AAs are elected, is not explained by announcement effect, and is not significantly eroded by Reg-FD. The AA status predicts performance in buys beyond other analyst characteristics. In response to labor market movements resulting from regulation changes around 2002-2003, institutional investors reshuffled the AA pool in a way that preserved its performance. Profits from AAs’ recommendations diminish quickly with access delay. We conclude that institutional investors are effective in evaluating analysts and that the AA status at least partially reflects skill. While institutional investors are well positioned to benefit from AAs’ views, other investors have limited ability to do so, consistent with Grossman and Stiglitz (1980).
Keywords: Institutional investors; performance evaluation; analyst skill; stock recommendations; star analysts; star status; reputation.
JEL Classification: G1, G2
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Can Investors Profit from the Prophets? Consensus Analyst Recommendations and Stock Returns
By Brad M. Barber, Reuven Lehavy, ...
-
Security Analysts' Career Concerns and Herding of Earnings Forecasts
By Jeffrey D. Kubik, Amit Solomon, ...
-
By Patricia Dechow, Amy P. Hutton, ...
-
Analyzing the Analysts: When Do Recommendations Add Value?
By Narasimhan Jegadeesh, Joonghyuk Kim, ...
-
An Empirical Analysis of Analysts' Target Prices: Short Term Informativeness and Long Term Dynamics
By Alon Brav and Reuven Lehavy
-
How Do Analysts Use Their Earnings Forecasts in Generating Stock Recommendations?