The profitability of financial analysts' recommendations: evidence from an emerging market

This article aims at measuring recommendation value on the Tunisian market and uses a database of 6646 recommendations (2005-2009). We apply the methodology of calendar-time portfolio analysis. This consists in simulating a portfolio that would include stocks depending on the recommendations issued. In order to measure abnormal (or "excess") returns, the raw return of the portfolio is then compared to the evolution of the stock index and to the prediction of the Capital Asset Pricing Model. Portfolios following buy recommendations have raw monthly returns around 2% to 3%, but their excess return is not statistically different from zero. The portfolios following sell recommendations have a positive raw return but a significant negative excess return, which is explained mainly by the strong uprising trend of the Tunisian market on the sample period. Furthermore, although portfolios that follow upgraded recommendation have a positive raw return, the abnormal returns of upgrade or downgrade portfolios are not significantly different from zero. We build long-short portfolios, some of which earn a positive significant excess risk-adjusted return of 1.19% per month. Finally, the fact that "sell" signals are largely more informative than "buy" signals suggests that the market trend on a five years scale probably influences the ability of analysts to pick stocks that evolves reversely from the trend