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Profitability of investment strategies developed on the basis of buy and sell recommendations

Author

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  • Wnuczak Paweł

    (Department of Finance, Kozminski University, Warsaw, Poland)

Abstract

Aim/purpose – The paper has two objectives. The first is to examine the profitability of applying investment strategies based on “buy” and “sell” recommendations issued by stock market analysts. The second objective is to validate that analysts who issue a recommendation may not be impartial (not supporting any of the sides involved in an argument) because the largest group of recommendations issued is “buy” recommendations. Design/methodology/approach – This study was conducted based on all the “buy” and “sell” recommendations issued during the period between January 1, 2004 and December 31, 2016 for companies listed on the Warsaw Stock Exchange, using data from www.bankier.pl. The annual forecast rates of return were determined for all the recommendations included in the survey. The expected rates of return were determined for each recommendation based on the information collated from the Bloomberg database. The regression analysis enabled the exploration of the relationship between the actual rates of return and the rates of return predicted in recommendations. Findings – It was determined that investing on the basis of the information included in “sell” recommendations might make it possible to avoid unprofitable investments. At the same time, the study shows that an investment strategy compliant with “buy” recommendations does not let the investor achieve the expected rates of return on an investment in the capital market in the long term. Research implications/limitations – The conducted research could be an important source of information for stock market investors’ decision-making regarding investments. Originality/value/contribution – Despite the topic of recommendation effectiveness being very important from the perspective of capital market theory and practice, it is still unclear whether investing based on information provided in stock market recommendations can be a profitable strategy in the long run. The study offers a bridge to fill the existing research gap.

Suggested Citation

  • 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.
    • Handle: RePEc:vrs:jecman:v:43:y:2021:i:1:p:317-338:n:12
    DOI: 10.22367/jem.2021.43.15
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    References listed on IDEAS

    as
    1. 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.
    2. Jeffrey Hobbs & Terrill R. Keasler & Chris R. McNeil, 2012. "Short Selling Behavior and Mad Money," The Financial Review, Eastern Finance Association, vol. 47(1), pages 65-89, February.
    3. Ryan, Paul & Taffler, Richard J., 2006. "Do brokerage houses add value? The market impact of UK sell-side analyst recommendation changes," The British Accounting Review, Elsevier, vol. 38(4), pages 371-386.
    4. Chen Su & Hanxiong Zhang & Kenbata Bangassa & Nathan Lael Joseph, 2019. "On the investment value of sell-side analyst recommendation revisions in the UK," Review of Quantitative Finance and Accounting, Springer, vol. 53(1), pages 257-293, July.
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    More about this item

    Keywords

    recommendations; stock exchange; investment;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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