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

33 Pages Posted: 5 Mar 2007 Last revised: 9 Dec 2009

See all articles by Marina Balboa

Marina Balboa

University of Alicante - Department of Financial Economics

J. Carlos Gómez Sala

University of Alicante - Department of Financial Economics

Germán López-Espinosa

University of Navarra

Date Written: 2007

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

Suggested Citation

Balboa, Marina and Gomez Sala, Juan Carlos and López-Espinosa, Germán, Does the Value of Recommendations Depend on the Level of Optimism? A Country-Based Analysis (2007). Journal of Multinational Financial Management, Vol. 18, No. 4, 2008. Available at SSRN: https://ssrn.com/abstract=968015

Marina Balboa (Contact Author)

University of Alicante - Department of Financial Economics ( email )

Ctra. S. Vicente s/n
03690-S. Vicente del Raspeig
Alicante, San Vicente del Raspeig - Alicante 03690
Spain
+34 96 590 3400 Ext. 3135 (Phone)
+34 96 590 3621 (Fax)

Juan Carlos Gomez Sala

University of Alicante - Department of Financial Economics ( email )

Ctra. S. Vicente s/n
03690-S. Vicente del Raspeig
Alicante, San Vicente del Raspeig - Alicante 03690
Spain
+34 965909309 (Phone)
+34 965903621 (Fax)

Germán López-Espinosa

University of Navarra ( email )

Facultad de Ciencias Económicas y Empresariales
Edificio Amigos
Pamplona, Navarra 31080
Spain
+34 948425600 (Phone)
+34 948425626 (Fax)

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