Prophets and Losses: Reassessing the Returns to Analysts' Stock Recommendations

Brad Barber, Reuven Lehavy, Brett Trueman and Maureen McNichols
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Reuven Lehavy: U of California, Berkeley
Brett Trueman: Stanford U
Maureen McNichols: U of California, Berkeley

Research Papers from Stanford University, Graduate School of Business

Abstract: After a string of years in which security analysts' top stock picks significantly outperformed their plans, the year 2000 was a disaster. During that year the stocks least favorably recommended by analysts earned an annualized market-adjusted return of 48.66 percent while the stocks most highly recommended fell 31.20 percent, a return difference of almost 80 percentage points. This pattern prevailed during most months of 2000, regardless of whether the market was rising or falling, and was observed for both tech and non-tech stocks. While we cannot conclude that the 2000 results are necessarily driven by an increased emphasis on investment banking by analysts, our findings should add to the debate over the usefulness of analysts' stock recommendations to investors. They should also serve to alert researchers to the possibility that excluding the year 2000 from their sample period could have a significant impact on any conclusions they draw concerning analysts' stock recommendations.

Date: 2001-05
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