Analyzing the Analysts: When Do Recommendations Add Value?

Analyzing the Analysts: When Do Recommendations Add Value?
Author(s): Jegadeesh, Narasimhan and Kim, Joonghyuk and Krische, Susan D. and Lee, Charles M.C.
Year: 2002
Paper Number: GBS-FIN-2002-004
Goizueta Department: Finance

Abstract

We show that, consistent with economic incentives, 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., high value and positive momentum). Among stocks with unfavorable quantitative characteristics, higher consensus recommendations are associated with worse subsequent returns. In contrast, the quarterly change in the consensus recommendation is a robust return predictor that appears to contain information orthogonal to a large range of other predictive variables.