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Measuring the Added Value of Stock Recommendations

Published online by Cambridge University Press:  23 May 2019

Anders Anderson ,
Howard Jones Open the ORCID record for Howard Jones [Opens in a new window]  and
José Vicente Martinez
Anders Anderson
Affiliation:
Anderson, anders.anderson@hhs.se, Swedish House of Finance, Stockholm School of Economics
Howard Jones*
Affiliation:
Jones, howard.jones@sbs.ox.ac.uk, Saïd Business School, University of Oxford
José Vicente Martinez
Affiliation:
Martinez, jose.v.martinez@uconn.edu, University of Connecticut School of Business
*
Jones (corresponding author), howard.jones@sbs.ox.ac.uk
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Abstract

Using data from the Stockholm Stock Exchange (SSE), we study the value added by (as distinct from the abnormal returns to) analysts’ recommendations. Recommending brokers’ clients trade profitably around positive recommendations at the expense of other brokers’ clients. Significant profits come from transactions before recommendation dates. Value added is greatest for upgrades to large caps, and largely insignificant for downgrades and recommendations of small caps, despite high abnormal returns. Brokers making profitable recommendations generate abnormally high commission income, recouping much of their clients’ abnormal profits, and their abnormal commission income varies in line with the abnormal profits for their clients.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 55 , Issue 6 , September 2020 , pp. 1915 - 1945
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2019

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Footnotes

We are grateful to Ulf Axelson, Jules van Binsbergen, Lauren Cohen, Jennifer Conrad (the editor), Magnus Dahlquist, Jennifer Juergens (the referee), Elizabeth Kempf, Göran Robertsson, Per Strömberg, Eric Tan, Michela Verardo, and seminar participants at BI Norwegian School of Management, Copenhagen Business School, HEC Paris, RSM Erasmus University, Saïd Business School (Oxford), SIFR, Stockholm School of Economics, Stockholm University, the University of Amsterdam, the University of St. Gallen, the 2016 European Finance Association Annual Meeting, and the 2016 Australasian Finance and Banking Conference for helpful comments and suggestions. Special thanks to Petter Dahlström and Mattias Olausson at Nasdaq OMX and Erik Eklund at the Swedish House of Finance for providing us with the data, to Nasdaq Nordic Foundation for financial support, and to Zihao Liu for excellent research assistance.

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