Reassessing the Returns to Analysts' Stock Recommendations

Posted: 20 May 2003

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

Abstract

After a string of years in which security analysts' top stock picks significantly outperformed their pans, the years 2000 and 2001 were disasters. During those two years, the stocks least favored by analysts earned an average annualized market-adjusted return of 13.44 percent whereas the stocks most highly recommended underperformed the market by 7.06 percent, a return difference of more than 20 percentage points. This pattern prevailed during most months of 2000 and 2001 and was observed for both technology and non-technology stocks. Additional analysis suggests that these poor results were driven, at least in part, by analysts' tendency to recommend small-capitalization growth stocks during those years, despite the fall of those stocks from favor. Whether or not this preference was motivated by a desire to attract and retain the most lucrative investment banking clients, our findings should add to the debate over the usefulness of analyst stock recommendations. They should also serve to alert researchers to the possibility that excluding 2000 and 2001 from their sample periods could have a significant impact on any conclusions they draw about analyst stock recommendations.

Keywords: Equity Investments: fundamental analysis and valuation models

JEL Classification: G12, G14, G29, M41

Suggested Citation

Barber, Brad M. and Lehavy, Reuven and McNichols, Maureen F. and Trueman, Brett, Reassessing the Returns to Analysts' Stock Recommendations. Financial Analysts Journal, Vol. 59, No. 2, March/April 2003. Available at SSRN: https://ssrn.com/abstract=390804

Brad M. Barber (Contact Author)

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

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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