Abstract Details
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Activity Number:
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337
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Type:
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Contributed
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Date/Time:
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Tuesday, August 5, 2014 : 10:30 AM to 12:20 PM
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Sponsor:
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Business and Economic Statistics Section
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Abstract #311037
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Title:
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Influential Analyst Recommendations: Are They Hidden Gems?
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Author(s):
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Jose Faias*+ and Pedro Mascarenhas
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Companies:
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Catolica Lisbon SBE and Catolica Lisbon SBE
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Keywords:
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Signaling ;
Analyst recommendations ;
Out of sample ;
Strategy
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Abstract:
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We find that 21% of sell-side analysts' stock recommendation revisions move stock prices significantly on the event date. With a model that predicts influential revisions out-of-sample, the paper shows that these predictions can be used to form long-short one-month portfolios that earn almost 17% per annum with Sharpe ratios exceeding 1. This is one of the biggest anomalies ever uncovered, almost twice the annual returns of price momentum. We find that, ex ante, such revisions depend on the magnitudes of recommendation changes, concurrent earnings forecasts issued around the recommendation change, and the percentage of firm institutional ownership.
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