Projected earnings accuracy and the profitability of stock recommendations
We document that investors can actually profit from the contemporaneous link between earnings accuracy and recommendation profitability (Loh and Mian (2006)). Differentiating between 'able' and 'lucky' analysts we suggest an implementable, i.e. look-ahead bias free, trading strategy that yields annual excess returns of 11.5% before transactions costs during our 1994 - 2007 sample period. Rather than past track records analysts' characteristics indicate their ability to identify undervalued stocks. We find that a reputation effect, i.e. higher recommendation announcement returns, is insignificant. This indicates that the ability is real. Able analysts can distinguish between firms that will over- or underperform.
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