The Profitability of Analysts’ Stock Recommendations: What Role Does Investor Sentiment Play?*

Abstract

This study investigates whether analysts who pay attention to investor sentiment issue more or less profitable stock recommendations than their peers. We find that analysts whose stock recommendations are positively correlated with recent or future investor sentiment tend to issue relatively less profitable recommendations. Our results suggest that analysts attempting to maximize the profitability of their stock recommendations may wish to focus on fundamentals such as earnings, cash flows, and discount rates rather than attempting to predict investor sentiment or other signals that may affect a firm’s stock price but that are not theoretically related to the firm’s underlying intrinsic value.

Keywords: investor sentiment, financial analysts, stock recommendations

JEL Classification: M41