Analyzing the Analysts: When Do Recommendations Add Value?

By Narasimhan Jegadeesh, Joonghyuk Kim, Susan D. Krische, Charles M. C. Lee. 2004

941 citations recorded by the source corpus.

We show that analysts from sell-side firms generally recommend "glamour" (i.e., positive momentum, high growth, high volume, and relatively expensive) stocks. Naive adherence to these recommendations can be costly, because the "level" of the consensus recommendation adds value only among stocks with favorable quantitative characteristics (i.e., value stocks and positive momentum stocks). In fact, among stocks with unfavorable quantitative characteristics, higher consensus recommendations are associated with worse subsequent returns. In contrast, we find that the quarterly "change" in consensus recommendations is a robust return predictor that appears to contain information orthogonal to a large range of other predictive variables. Copyright 2004 by The American Finance Association.

Subfields: Accounting, Finance, General Decision Sciences

View Paper: https://www.semanticscholar.org/paper/86238bf2065f6646b20f940f5f457f8f05a8a2df

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Citations in the corpus

Corporate Social Performance, Analyst Stock Recommendations, and Firm Future Returns (2015, positive): “We have a comprehensive set of firm- and industry-level covariates, closely following the widely used models of financial analyst metrics (Jegadeesh et al., 2004) and firm financial value in finance and accounting (Lui et al., 2007).”
Do Analysts Practice What They Preach and Should Investors Listen? Effects of Recent Regulations (2009, positive): “In this paper, we choose to follow Bradshaw (2004) and Jegadeesh et al. (2004) and examine recommendation levels.”
The Impact of Corporate Social Responsibility on Investment Recommendations: Analysts’ Perceptions and Shifting Institutional Logics (2015, background): “We expect positive coefficients on all three variables (Jegadeesh et al., 2004).”
Analyst Recommendations, Mutual Fund Herding, and Overreaction in Stock Prices (2014, neutral): “For helpful comments and suggestions, the authors thank department editor Wei Jiang, an associate editor, Mark Chen, Loran Chollete, Phil Dybvig, Lily Fang, Ken Fuller, John Griffin, Jennifer Huang, Ravi Jagannathan, Narasimhan Jegadeesh, Wei Jiang, Marcin Kacperczyk, Dong Lou, Pedro Matos, Scott Ri”
Do sell-side analysts exhibit differential target price forecasting ability? (2012, positive): “(Jegadeesh et al. 2004) so we expect PRCMOM to be negative (positive) when target price”
On the Predictability of Chinese Stock Returns (2010, positive): “Following Wang (2004) and Kang, et al. (2002), we use the monthly yield of the three-month household deposit interest rate in China as the risk-free rate.”
Buys, Holds, and Sells: The Distribution of Investment Banks' Stock Ratings and the Implications for the Profitability of Analysts' Recommendations (2006, background): “(Only those institutional investors who subscribed to either First Our focus on changes in analysts’ recommendations is consistent with Jegadeesh et al. (2004) who find22 that changes in recommendations have greater predictive power for returns than do recommendation levels.”
Do accurate earnings forecasts facilitate superior investment recommendations (2006, positive): “Prior literature finds that the distribution of recommendations across the five categories is skewed – there are far more favorable recommendations than the unfavorable ones (see, for example, Jegadeesh et al. (2001), and Barber et al. (2001)).”
A New Approach to Predicting Analyst Forecast Errors: Do Investors Overweight Analyst Forecasts? (2013, background): “First, because I do not examine transaction costs, it is not clear that the pattern of return predictability represents available economic pro t opportunities as de ned by Jensen (1978). However, because the investment strategy requires a single portfolio rebalance for each rm-year, it seems unlikel”
THE IMPACT OF CORPORATE SOCIAL RESPONSIBILITY ON INVESTMENT RECOMMENDATIONS. (2010, background): “We expect positive coefficients on all three variables (Jegadeesh et al., 2004).”