Prophets and Losses: Reassessing the Returns to Analysts' Stock Recommendations

19 Pages Posted: 18 May 2001

See all articles by Brad M. Barber

Brad M. Barber

University of California, Davis

Reuven Lehavy

University of Michigan, Stephen M. Ross School of Business

Maureen F. McNichols

Stanford University

Brett Trueman

University of California, Los Angeles (UCLA) - Anderson School of Management

Date Written: May 2001

Abstract

After a string of years in which security analysts' top stock picks significantly outperformed their pans, the year 2000 was a disaster. During that year the stocks least favorably recommended by analysts earned an annualized market-adjusted return of 48.66 percent while the stocks most highly recommended fell 31.20 percent, a return difference of almost 80 percentage points. This pattern prevailed during most months of 2000, regardless of whether the market was rising or falling, and was observed for both tech and non-tech stocks. While we cannot conclude that the 2000 results are necessarily driven by an increased emphasis on investment banking by analysts, our findings should add to the debate over the usefulness of analysts' stock recommendations to investors. They should also serve to alert researchers to the possibility that excluding the year 2000 from their sample period could have a significant impact on any conclusions they draw concerning analysts' stock recommendations.

JEL Classification: G29, G24, M41

Suggested Citation

Barber, Brad M. and Lehavy, Reuven and McNichols, Maureen F. and Trueman, Brett, Prophets and Losses: Reassessing the Returns to Analysts' Stock Recommendations (May 2001). Available at SSRN: https://ssrn.com/abstract=269119 or http://dx.doi.org/10.2139/ssrn.269119

Brad M. Barber

University of California, Davis ( email )

Graduate School of Management
One Shields Avenue
Davis, CA 95616
United States
530-752-0512 (Phone)
530-752-2924 (Fax)

Reuven Lehavy (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI 48109
United States
734-763-1508 (Phone)
734-936-0282 (Fax)

Maureen F. McNichols

Stanford University ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
650-723-0833 (Phone)

Brett Trueman

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States
310-825-4720 (Phone)
310-267-2193 (Fax)

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