Man versus Machine: A Comparison of Robo-Analyst and Traditional Research Analyst Investment Recommendations

46 Pages Posted: 21 Jan 2020 Last revised: 20 Feb 2020

See all articles by Braiden Coleman

Braiden Coleman

Indiana University - Kelley School of Business - Department of Accounting

Kenneth J. Merkley

Indiana University - Kelley School of Business - Department of Accounting

Joseph Pacelli

Indiana University - Kelley School of Business - Department of Accounting

Date Written: February 2020

Abstract

Advances in financial technology (FinTech) have revolutionized various product offerings in the financial services industry. One area of particular interest for this technology is the production of investment recommendations. Our study provides the first comprehensive analysis of the properties of investment recommendations generated by “Robo-Analysts,” which are human-analyst-assisted computer programs conducting automated research analysis. Our results indicate that Robo-Analyst recommendations differ from those produced by traditional “human” research analysts across several dimensions. First, Robo-Analysts collectively produce a more balanced distribution of buy, hold, and sell recommendations than do human analysts, consistent with them being less subject to behavioral biases and conflicts of interest. Second, consistent with automation facilitating a greater scale of research production, Robo-Analysts revise their recommendations more frequently than human analysts and also adopt different production processes. Their recommendation revisions rely less on earnings announcements, and more on the large volumes of data released in firms’ annual reports. Third, Robo-Analysts’ recommendation revisions exhibit weaker short-window return reactions, suggesting that investors do not trade on their signals. Importantly, portfolios formed based on the buy recommendations of Robo-Analysts appear to outperform those of human analysts, suggesting that their buy calls are more profitable. Overall, our results suggest that Robo-Analysts are a valuable, alternative information intermediary to traditional sell-side analysts for investment advice.

Keywords: FinTech, Analysts, Robo-Analyst, Investment Recommendations

JEL Classification: G14, G24

Suggested Citation

Coleman, Braiden and Merkley, Kenneth J. and Pacelli, Joseph, Man versus Machine: A Comparison of Robo-Analyst and Traditional Research Analyst Investment Recommendations (February 2020). Available at SSRN: https://ssrn.com/abstract=3514879 or http://dx.doi.org/10.2139/ssrn.3514879

Braiden Coleman

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States

Kenneth J. Merkley

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States

Joseph Pacelli (Contact Author)

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States

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