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The origin of outperformance for stock recommendations by sell-side analysts

Author

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  • Kucheev, Yury O.

    (Department of Industrial Management, Business Administration and Statistics, School of Industrial Engineering, Technical University of Madrid (UPM), Madrid, Spain & Department of Industrial Economics and Management, School of Industrial Engineering and Management, Royal Institute of Technology (KTH), Stockholm, Sweden.)

  • Sorensson, Tomas

    (Department of Industrial Economics and Management, School of Industrial Engineering and Management, Royal Institute of Technology(KTH) & Swedish House of Finance, Stockholm School of Economics, Stockholm, Sweden.)

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.

Suggested Citation

  • Kucheev, Yury O. & Sorensson, Tomas, 2016. "The origin of outperformance for stock recommendations by sell-side analysts," INDEK Working Paper Series 2016/13, Royal Institute of Technology, Department of Industrial Economics and Management.
    • Handle: RePEc:hhs:kthind:2016_013
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Alpha; Sell-side analyst recommendations; Attribution analysis; StarMine; Institutional Investor; The Wall Street Journal;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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