The Investment Value of Contrarian Buy-Side Recommendations

Abstract

We examine a comprehensive set of investment recommendations paired with analyst-specific information from over 1,000 buy-side analysts (predominantly analysts from hedge funds) from the private website SumZero.com. Recommendations from these analysts generate significant returns when the reports are posted to the website. Returns are the most dramatic for contrarian recommendations (i.e., those issued contrary to the sell-side consensus), particularly for buy recommendations. Furthermore, the returns to both buy and sell recommendations drift in the direction of the recommendation. We also explore institutional ownership changes and document a wealth transfer between the broader institutional market and buy-side firms in the sample. Collectively, the evidence suggests buy-side recommendations have investment value. The results also document the importance of new technologies in disseminating information to market participants.

Keywords: Hedge funds, buy-side analysts, sell-side analysts, stock recommendations

JEL Classification: G10, G14