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Can Investors Profit from the Prophets? Security Analyst Recommendations and Stock Returns

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  • Brad Barber
  • Reuven Lehavy
  • Maureen McNichols
  • Brett Trueman

Abstract

We document that purchasing (selling short) stocks with the most (least) favorable consensus recommendations, in conjunction with daily portfolio rebalancing and a timely response to recommendation changes, yield annual abnormal gross returns greater than four percent. Less frequent portfolio rebalancing or a delay in reacting to recommendation changes diminishes these returns; however, they remain significant for the least favorably rated stocks. We also show that high trading levels are required to capture the excess returns generated by the strategies analyzed, entailing substantial transactions costs and leading to abnormal net returns for these strategies that are not reliably greater than zero.

Suggested Citation

  • Brad Barber & Reuven Lehavy & Maureen McNichols & Brett Trueman, 2001. "Can Investors Profit from the Prophets? Security Analyst Recommendations and Stock Returns," Journal of Finance, American Finance Association, vol. 56(2), pages 531-563, April.
    • Handle: RePEc:bla:jfinan:v:56:y:2001:i:2:p:531-563
    DOI: 10.1111/0022-1082.00336
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