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Can investors profit from security analyst recommendations?: New evidence on the value of consensus recommendations

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  • Park, Sung Jun
  • Park, Ki Young

Abstract

This paper revisits the question of whether investors can benefit from consensus recommendations of stock market analysts in US equity markets. To examine the profitability net of transactions cost, we calculate several measures of transactions costs based on effective tick spreads and others. We find that transactions cost becomes noticeably lower from 2001 and the strategy of purchasing ‘strong buy’ stocks and shorting ‘strong sell’ stocks yields the abnormal returns of 4.7–5.8% per year during the period of 2001–2016, even after accounting for transactions cost. We also find that ‘strong buy (sell)’ stocks are growth (value) firms and short-term winners (losers). We discuss our empirical results in the context of market efficiency.

Suggested Citation

  • Park, Sung Jun & Park, Ki Young, 2019. "Can investors profit from security analyst recommendations?: New evidence on the value of consensus recommendations," Finance Research Letters, Elsevier, vol. 30(C), pages 403-413.
    • Handle: RePEc:eee:finlet:v:30:y:2019:i:c:p:403-413
    DOI: 10.1016/j.frl.2018.11.008
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    References listed on IDEAS

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    Cited by:

    1. Wnuczak Paweł, 2021. "Profitability of investment strategies developed on the basis of buy and sell recommendations," Journal of Economics and Management, Sciendo, vol. 43(1), pages 317-338, May.
    2. Tiniç, Murat & Tanyeri, Başak & Bodur, Mehmet, 2021. "Who to trust? Reactions to analyst recommendations of domestic versus foreign brokerage houses in a developing stock market," Finance Research Letters, Elsevier, vol. 43(C).

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    More about this item

    Keywords

    Consensus recommendations; Transactions cost; Asset pricing; Market efficiency;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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