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

59 Pages Posted: 21 Jan 2020 Last revised: 1 Apr 2021

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

Harvard Business School

Date Written: March 2021

Abstract

We provide 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 important dimensions. First, Robo-Analysts produce a more balanced distribution of buy, hold, and sell recommendations than do human analysts and are less likely to recommend “glamour” stocks and firms with prospective investment banking business. Second, automation allows Robo-Analysts to revise their recommendations more frequently than human analysts and incorporate information from complex periodic filings. Third, while Robo-Analysts’ recommendations exhibit weak short-window return reactions, they have long-term investment value. Specifically, portfolios formed based on the buy recommendations of Robo-Analysts significantly outperform those of human analysts. Overall, our results suggest that automation in the sell-side research industry can benefit investors.

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

JEL Classification: G14, G24

Suggested Citation

Coleman, Braiden and Merkley, Kenneth J. and Pacelli, Joseph, Human versus Machine: A Comparison of Robo-Analyst and Traditional Research Analyst Investment Recommendations (March 2021). 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)

Harvard Business School ( email )

Boston, MA 02163
United States

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