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International Evidence on Analyst Stock Recommendations, Valuations, and Returns

51 Pages Posted: 28 Feb 2009 Last revised: 23 Jan 2010

Ran Barniv

Kent State University - Department of Accounting

Ole-Kristian Hope

University of Toronto - Rotman School of Management

Mark Myring

Ball State University - Department of Accounting

Wayne B. Thomas

University of Oklahoma - Michael F. Price College of Business

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Date Written: January 19, 2010

Abstract

This is the first large study to examine the relation between analysts’ stock recommendations, earnings forecasts, and future excess stock returns in an international context. We first document that some of the peculiar findings established in the U.S. extend to other countries where individual investor participation in the stock market is high (especially when Japan is excluded from the sample). Specifically, we find that analysts’ recommendations relate positively to simple heuristics but negatively to more rigorous residual income valuation estimates (scaled by price). Furthermore, residual income valuation estimates relate positively to future returns, indicating their usefulness to investors, while analysts’ recommendations and heuristics relate negatively to future stock returns. In contrast, in countries with low investor participation rates, these peculiar findings are less observable. In these countries, analysts appear to rely relatively more on residual income valuation estimates in setting their recommendations, and these recommendations relate positively to future returns. The overall results are consistent with analysts’ recommendations being influenced by economic incentives other than identifying mispriced stocks in countries with high investor participation rates, substantiating puzzling results in the U.S.

Keywords: Analysts, international, valuation, earnings forecasts, stock recommendations, investor participation, investor protection

JEL Classification: G29, G14, G15, K22

Suggested Citation

Barniv, Ran and Hope, Ole-Kristian and Myring, Mark and Thomas, Wayne B., International Evidence on Analyst Stock Recommendations, Valuations, and Returns (January 19, 2010). Available at SSRN: https://ssrn.com/abstract=1350616 or http://dx.doi.org/10.2139/ssrn.1350616

Ran Barniv

Kent State University - Department of Accounting ( email )

P.O. Box 5190
Kent, OH 44242-0001
United States
330-672-1112 (Phone)
330-672-2548 (Fax)

Ole-Kristian Hope (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

HOME PAGE: http://www.rotman.utoronto.ca/FacultyAndResearch/Faculty/FacultyBios/Hope.aspx

Mark Myring

Ball State University - Department of Accounting ( email )

2000 W. University Ave.
Muncie, IN 47306
United States

Wayne Thomas

University of Oklahoma - Michael F. Price College of Business ( email )

Michael F. Price College of Business,
307 W Brooks, Rm 212B
Norman, OK 73019
United States
405-325-5789 (Phone)
405-325-7348 (Fax)

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