The origin of outperformance for stock recommendations by sell-side analysts.
2017 (English)Article in journal (Refereed) Submitted
Since Barber et al. (2006, JAE) reported a methodology for measuring the investment value of sell-side analysts' recommendations by constructing a "paper portfolio", this method has become the standard approach in the related academic literature. In this paper, we replicate this portfolio methodology and investigate whether the portfolios' outperformance is explained by the analysts' stock picking skills or it is an artifact of the portfolio construction approach. We examine 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 show that the portfolios' abnormal returns are explained primarily by the analysts' stock picking ability and only partially by the effect of an overweight in small-cap stocks, given that more than 80% of the studied portfolios are concentrated in the three smallest size deciles.
Place, publisher, year, edition, pages
Alpha, Sell-side analyst recommendations, Attribution analysis, Institutional Investor, StarMine, The Wall Street Journal
IdentifiersURN: urn:nbn:se:kth:diva-205278OAI: oai:DiVA.org:kth-205278DiVA: diva2:1088232
QC 201704122017-04-112017-04-112017-04-20Bibliographically approved