The role of sentiment and stock characteristics in the translation of analysts’ forecasts into recommendations

Pilar Corredor, Elena Ferrer and Rafael Santamaria

The North American Journal of Economics and Finance, 2019, vol. 49, issue C, 252-272

Abstract: The purpose of this paper is to further understanding of the determinants of analysts’ translational effectiveness and, specifically, the role of stock characteristics in the impact of sentiment in the translation of analysts’ forecasts into recommendations. We construct a proxy of intrinsic value of a stock based on that of Ohlson (1995), which incorporates all the information contained in the analysts’ earnings forecasts. Our results show that, although analysts do translate their earnings forecast valuations into recommendations, the effectiveness of this process is reduced by investor sentiment only in highly sentiment-sensitive stocks. This suggests the degree of analyst coverage as a potential conditioner of the observable results in a market. While not totally eliminating this observed effect, the Market Abuse Directive regulation does contribute to reduce the skew between analysts’ earnings forecasts and their recommendations. Finally, analysis of this effect reveals that this kind of skew enables investment strategies yielding positive risk-adjusted returns in highly sentiment-sensitive stocks, during periods of high market sentiment.

Keywords: Investor sentiment; Financial analyst; Analysts coverage; Recommendation; Earning forecast; Translational effectiveness (search for similar items in EconPapers)
JEL-codes: G02 G15 G24 M41 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:49:y:2019:i:c:p:252-272

DOI: 10.1016/j.najef.2019.04.008

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