Does the Value of Recommendations Depend on the Level of Optimism? A Country-Based Analysis

Abstract

This paper analyses the investment value of analysts' consensus recommendations and their changes in eight developed stock markets using equity recommendations from Factset/JCF database, in the period from January 1994 to June 2004. Our results show that analysts are optimistically biased, albeit to a different degree in each country; tending to issue a much higher number of buy than sell recommendations. Overall, investors can obtain risk adjusted abnormal returns by selling stocks that are unfavourably recommended or with a downward revision but not by buying the most favourably recommended stocks or those with an upward revision. However, the credibility investors give to recommendations seems to depend on this optimism bias as the risk adjusted returns of the entries/exits of the favourable category (unfavourable) are only significant in countries with a low (high) level of bias.

Keywords: Financial analysis, Value of analysts' recommendations, Performance evaluation of portfolios

JEL Classification: G10, G14, G20, G24