Recommendation Pattern Preferences and Share Analysts Bias on the JSE

The trustworthiness of analysts’ reports has rightly been questioned after the financial crises of the 1990s and 2000s revealed biases in their behaviour. This study investigated the inclination of analysts to issue overly-positive recommendations, the issuance patterns preferred by individual analysts, and the differential impact of recommendations between periods of positive and negative sentiment. The recommendation issuance preferences of 901 local and international analysts, who collectively issued 30 486 recommendations for shares listed on the Johannesburg Securities Exchange from 1993 to 2011, were scrutinised. The investigation revealed that analysts issued their opinions using many different patterns within five possible recommendation categories, and showed signs of positive biases during all market cycles and investor sentiment periods. Surprisingly, analysts issued the same proportion of negative recommendations during periods of low business confidence and economic contraction than during phases of growth- and economic upswing. The BER Business Confidence Index outperformed the SARB’s business cycle indicator in demarcating periods where investors reacted stronger to recommendations issued by analysts. Investors are advised to study an analyst’s recommendation history in addition to current advice.