What Are Analysts Really Good At?

54 Pages Posted: 18 Nov 2011 Last revised: 14 Nov 2013

Ohad Kadan

Washington University in Saint Louis - John M. Olin Business School

Leonardo Madureira

Case Western Reserve University - Weatherhead School of Management

Rong Wang

Singapore Management University; Singapore Management University - Lee Kong Chian School of Business

Tzachi Zach

Ohio State University (OSU) - Fisher College of Business

Date Written: May 1, 2012

Abstract

Sell-side analysts employ different benchmarks when defining their stock recommendations. For example, a ‘buy’ for some brokers means the stock is expected to outperform its peers in the same sector (“industry benchmarkers”), while for other brokers it means the stock is expected to outperform the market (“market benchmarkers”), or just some absolute return (“total benchmarkers”). We use these benchmarks to analyze the role of stock picking, industry picking and market timing in contributing to the performance of stock recommendations. We are able to do so given that different benchmarks suggest the use of different sets of abilities. Analysis of the relation between analysts’ recommendations and their long-term growth and earnings forecasts suggests that analysts indeed abide by their benchmarks. We find strong evidence that the investment value of stock recommendations stems from analysts picking winners and losers within a particular industry (stock picking) regardless of the declared benchmark. We find no evidence of either industry picking or market timing even for analysts whose benchmarks suggest the existence of such skills. The research carries implications for the correct understanding and interpretation of sell-side research and its investment value.

Keywords: Analysts, Benchmarks, Stock Picking, Industry Picking, Market Timing

JEL Classification: G10, G24

Suggested Citation

Kadan, Ohad and Madureira, Leonardo and Wang, Rong and Zach, Tzachi, What Are Analysts Really Good At? (May 1, 2012). AFA 2013 San Diego Meetings Paper; 26th Australasian Finance and Banking Conference 2013. Available at SSRN: https://ssrn.com/abstract=1961199 or http://dx.doi.org/10.2139/ssrn.1961199

Ohad Kadan

Washington University in Saint Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Leonardo Madureira

Case Western Reserve University - Weatherhead School of Management ( email )

364 PBL Building
Cleveland, OH 44106
United States
216-368-5003 (Phone)

HOME PAGE: http://faculty.weatherhead.case.edu/madureira/

Rong Wang

Singapore Management University ( email )

Li Ka Shing Library
70 Stamford Road
Singapore 178901, 178899
Singapore

Singapore Management University - Lee Kong Chian School of Business ( email )

469 Bukit Timah Road
Singapore 912409
Singapore

Tzachi Zach (Contact Author)

Ohio State University (OSU) - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
614-292-4101 (Phone)

Paper statistics

Downloads
331
Rank
71,419
Abstract Views
2,425