Are Analyst Short‐Term Trade Ideas Valuable?

Abstract

Short-term trade ideas are a component of analyst research highly valued by institutional investors. Using a novel and comprehensive database, we find that trade ideas have a stock price impact at least as large as recommendation and target price changes. Trade ideas based on expectations of future events are more informative than those identifying incomplete incorporation of past information in stock prices. Analysts with better access to a firm's management produce better trade ideas. Institutional investors trade in the direction of trade ideas. Investors following trade ideas can earn significant abnormal returns, consistent with analysts possessing valuable short-term stock-picking skills.ON NOVEMBER 26, 2012, THE analyst following the common stock of Bank of America (BAC) at Guggenheim Securities made a tactical trading call suggesting that investors sell BAC over the next three months based on his expectation of the impact on BAC of the U.S. economy being pushed over fiscal cliffs. At the same time, the analyst reiterated his buy recommendation on BAC over a 12-month period based on his long-term investment thesis. Although the literature has raised concerns about analysts speaking with two tongues (e.g., Malmendier and Shantikumar (2014)), here we have an analyst issuing a trading sell on BAC for the near term even though he considers it a buy for the long term. 1 Issuing diverging stock opinions across different investment horizons is an accepted practice by the Financial Industry Regulatory Authority (FINRA), the self-regulatory organization of the securities industry, because doing so

Do investors benefit from MiFID II unbundling?

“…With respect to sell-side research, several papers have documented that this type of research can be valuable (see, for example, Asquith et al, 2005;Birru et al, 2022;Di Maggio et al, 2022;Jegadeesh et al, 2004) but actual trading strategies tend to fail to offset any associated trading costs (Barber et al, 2001;Kacperczyk and Seru, 2007). US fund managers whose portfolio changes were less correlated with sell-side recommendations had better fund performance according to Kacperczyk and Seru (2007).…”