What are Analysts Really Good At?

Ohad Kadan
Madureira Leonardo
Rong WANG, Singapore Management University
Tzachi Zach

Also presented at 2012 IDC Summer Conference, 2012 FARS Conference, 2012 FIRS Conference, 2012 Asian Finance Conference, 2012 FMA Conference, and 2013 AFA Conference


Sell-side analysts employ different benchmarks when defining their recommendations. A ‘buy’ for some brokers means the stock is expected to outperform its industry, while for other brokers it means the stock is expected to outperform the market, or some absolute return. We use these benchmarks to analyze the role of stock picking, industry picking, and market timing in the investment value of stock recommendations. Analysis of the relation between analysts’ recommendations and their forecasts suggests that analysts abide by their benchmarks. We find strong evidence that the investment value of stock recommendations stems from stock picking within a particular industry. We find no evidence of either industry picking or market timing skills.