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Department of Industrial Economics and Management, Royal Institute of Technology INDEK Working Paper Series, Department of Industrial Economics and Management, Royal Institute of Technology

No 2016/13:
The origin of outperformance for stock recommendations by sell-side analysts

Yury O. Kucheev () and Tomas Sorensson ()

Abstract: We examine the structure of portfolios built on sell-side analysts’ recommendations and show that those portfolios’ abnormal returns are explained primarily by the analysts’ stock picking ability and only partially by the effect of overweight in small-cap stocks, given that more than 80% of the studied portfolios are concentrated in the three smallest Size Deciles. We document the portfolios’ abnormal returns by examining the number of stocks in the portfolios and the weights assigned to market-cap Size Deciles and Global Industry Classification Standard (GICS) sectors and perform an attribution analysis that allows us to identify the sources of overall value-added performance. We find that the average monthly added value of 0.46 (0.34) percent obtained on Strong Buy and Buy recommendations from Stars (Non-Stars) is primarily explained by the analysts’ intra-sector stock-picking skills and that the monthly added value of 0.16 (0.18) percent obtained from Stars (Non-Stars) is related to the portfolios’ allocation among size-specific deciles.

Keywords: Alpha; Sell-side analyst recommendations; Attribution analysis; StarMine; Institutional Investor; The Wall Street Journal; (follow links to similar papers)

JEL-Codes: G11; G23; G24; (follow links to similar papers)

36 pages, April 8, 2016

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