Broker Recommendations and Australian Small-Cap Equity Fund Management

29 Pages Posted: 23 Jan 2010 Last revised: 23 Apr 2010

See all articles by Carole Comerton-Forde

Carole Comerton-Forde

UNSW Business School; Financial Research Network (FIRN)

David R. Gallagher

Rozetta Institute

Joyce Lai

University of New South Wales

Terry S. Walter

University of Sydney; University of Technology, Sydney - School of Finance and Economics; Financial Research Network (FIRN)

Date Written: January 20, 2010

Abstract

This study examines the extent to which the abnormal performance of active Australian small-cap equity fund managers, previously documented by Chen et al. (2010), is associated with broker recommendations. Our empirical evidence supports the investment value of broker recommendations, showing statistically significant cumulative abnormal returns both pre and post broker recommendation dates. We find that a factor-mimicking portfolio based on broker recommendations results in a 48 basis point reduction in annual alphas estimated from a Carhart (1997) four-factor model (from 58 to 54 basis points a month). Using transaction-level data, buy trades following recommendations earn statistically significant cumulative abnormal returns of 1.56 percent after 60 days. Overall, we find evidence suggesting that broker recommendations play an important role in the investment decisions of small-cap fund managers, and these account for an economically significant component of the monthly alphas.

Suggested Citation

Comerton-Forde, Carole and Gallagher, David R. and Lai, Joyce P. and Walter, Terry Stirling, Broker Recommendations and Australian Small-Cap Equity Fund Management (January 20, 2010). Available at SSRN: https://ssrn.com/abstract=1540440 or http://dx.doi.org/10.2139/ssrn.1540440

Carole Comerton-Forde

UNSW Business School ( email )

UNSW Business School
High St
Sydney, NSW 2052
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

David R. Gallagher

Rozetta Institute ( email )

Sydney

Joyce P. Lai

University of New South Wales ( email )

Australian School of Business
The University of New South Wales
Sydney, NSW 2052
Australia
0410390313 (Phone)

Terry Stirling Walter (Contact Author)

University of Sydney ( email )

P.O. Box H58
Sydney, NSW 2006
Australia

University of Technology, Sydney - School of Finance and Economics ( email )

Haymarket
Sydney, NSW 2007
Australia
+61 2 9514 3860 (Phone)
+61 2 9514 7711 (Fax)

HOME PAGE: http://datasearch.uts.edu.au/business/finance/staff/StaffDetails.cfm?UnitStaffId=5373

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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