Can Investors Profit from Security Analyst Recommendations?

Abstract

This paper revisits the question of whether investors can benefit from consensus recommendations of stock market analysts in US equity markets. To examine the profitability net of transactions cost, we calculate transactions cost based on effective tick spread. We find that transactions cost becomes noticeably lower from 2001 and the strategy of purchasing 'strong buy' stocks and shorting 'strong sell' stocks yields the abnormal returns of 4.7-5.8% per year during the period of 2001-2016, even after accounting for transactions cost. We also find that 'strong buy (sell)' stocks are growth (value) firms and short-term winners (losers). We discuss our empirical results in the context of market efficiency.

Keywords: consensus recommendations, transactions cost, asset pricing, market efficiency

JEL Classification: G11, G12, G14