54 Pages Posted: 18 Nov 2011 Last revised: 14 Nov 2013
Date Written: May 1, 2012
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: 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
By John Graham