44 Pages Posted: 8 Mar 2006 Last revised: 13 Apr 2008
Date Written: October 2007
Using more than 350,000 sell-side analyst recommendations from January 1994 to August 2006, this paper examines the predictive content of aggregate analyst recommendations. We find strong evidence that aggregate changes in analyst recommendations forecast future market excess returns, suggesting that analyst recommendations contain market-level information not yet incorporated into market prices. Our results remain significant after controlling for macroeconomic variables that have been shown to influence market returns. A simple trading strategy based on lagged aggregate analyst recommendations yields an abnormal return of approximately 1% per quarter. Our results are not attributable to the implementation of NASD Rule 2711, nor are they driven by a small-sample bias. Further, changes in industry-aggregated analyst recommendations predict future industry returns. Overall, our findings suggest that analyst recommendations contain valuable market-level and industry-level information.
Keywords: analyst recommendation, predictability, market returns
JEL Classification: G14, M41
Suggested Citation: Suggested Citation
Howe, John S. and Yan, Xuemin Sterling and Unlu, Emre, The Predictive Content of Aggregate Analyst Recommendations (October 2007). AFA 2007 Chicago Meetings Paper. Available at SSRN: https://ssrn.com/abstract=888851 or http://dx.doi.org/10.2139/ssrn.888851