Analyzing the Analysts: When Do Recommendations Add Value?
Article first published online: 27 NOV 2005
The Journal of Finance
Volume 59, Issue 3, pages 1083–1124, June 2004
How to Cite
Jegadeesh, N., Kim, J., Krische, S. D. and Lee, C. M. C. (2004), Analyzing the Analysts: When Do Recommendations Add Value?. The Journal of Finance, 59: 1083–1124. doi: 10.1111/j.1540-6261.2004.00657.x
- Issue published online: 27 NOV 2005
- Article first published online: 27 NOV 2005
We show that analysts from sell-side firms generally recommend “glamour” (i.e., positive momentum, high growth, high volume, and relatively expensive) stocks. Naïve 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.