Analysts' Stock Recommendations, Earnings Growth and Risk
Accounting and Finance, Forthcoming
51 Pages Posted: 5 Apr 2016
Date Written: February 11, 2016
Abstract
A key output of sell-side analysts is their recommendations to investors as to whether they should, buy, hold or sell a company’s shares. However, relatively little is known regarding the determinants of those recommendations. This paper considers this question, presenting results that suggest that recommendations are dependent on analysts’ short-term and long-term earnings growth forecasts, as well as on proxies for the analysts’ unobservable views on earnings growth in the more distant future and risk. Furthermore, analysts who appear to incorporate earnings growth beyond the long-term growth forecast horizons and risk into their recommendation decisions make more profitable stock recommendations.
Keywords: stock recommendations, long-term growth forecast, really long-term growth, nonlinearity
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