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Analyzing the Analysts: When Do Recommendations Add Value?

55 Pages Posted: 22 Nov 2001  

Narasimhan Jegadeesh

Emory University - Department of Finance

Joonghyuk Kim

Case Western Reserve University - Department of Banking & Finance

Susan D. Krische

American University - Kogod School of Business

Charles M.C. Lee

Stanford University - Graduate School of Business

Date Written: May 16, 2002

Abstract

We show that, consistent with economic incentives, analysts from sell-side firms generally recommend "glamour" (i.e., positive momentum, high growth, high volume, and relatively expensive) stocks. Naive adherence to these recommendations can be costly, because the level of the consensus recommendation adds value only among stocks with favorable quantitative characteristics (i.e., high value and positive momentum). Among stocks with unfavorable quantitative characteristics, higher consensus recommendations are associated with worse subsequent returns. In contrast, the quarterly change in the consensus recommendation is a robust return predictor that appears to contain information orthogonal to a large range of other predictive variables.

Keywords: Analyst, Stock recommendations, Market efficiency, Investment, Trading rules, Quantitative analysis, Fundamental analysis

JEL Classification: G12, G14, G21, G24, G29

Suggested Citation

Jegadeesh, Narasimhan and Kim, Joonghyuk and Krische, Susan D. and Lee, Charles M.C., Analyzing the Analysts: When Do Recommendations Add Value? (May 16, 2002). AFA 2002 Atlanta Meetings. Available at SSRN: https://ssrn.com/abstract=291241 or http://dx.doi.org/10.2139/ssrn.291241

Narasimhan Jegadeesh (Contact Author)

Emory University - Department of Finance ( email )

Atlanta, GA 30322-2710
United States

Joonghyuk Kim

Case Western Reserve University - Department of Banking & Finance ( email )

10900 Euclid Ave.
Cleveland, OH 44106-7235
United States
216-368-2142 (Phone)
216-368-4776 (Fax)

Susan D. Krische

American University - Kogod School of Business ( email )

4400 Massachusetts Ave NW
Washington, DC 20016
United States
202-885-2082 (Phone)
202-885-1992 (Fax)

Charles M.C. Lee

Stanford University - Graduate School of Business ( email )

Stanford Graduate School of Business
655 Knight Way
Stanford, CA 94305-5015
United States
650-721-1295 (Phone)

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