Equity Analyst Recommendations: A Case for Affirmative Disclosure?

Abstract

The financial well‐being of retail investors is impacted by the quality of their investment decisions. Inaccurate or misleading financial information that is misconstrued by investors to be reliable can compromise decision making. This research reports on the results of three studies that show despite the fact that equities with “buy” ratings significantly underperform equities with “hold” ratings, retail investors rely on them when making investment decisions. It also shows analysts' guidance remains inaccurate in the aggregate despite the passage of Sarbanes‐Oxley and related legislation/regulation. This article begins a conversation on the implications of this dilemma, specifically the value of affirmative disclosure as a remedy.

Consumer’s subjective financial well‐being: A systematic review and research agenda

“…Naïve investors around the world rely on equity analysts’ recommendations to invest in the equities market. A study was done by Baker and Dumont (2014) to find that equities with “buy” ratings significantly underperform relative to equities with “hold” ratings, decreasing the FWB of general public/retail investors.…”

“…Research done in a developing country found that the attitude toward ethical selling, subjective norms, and perceived behavioral control explains salespersons' ethical selling intentions, thereby impacting the actual sales behavior (Ferdous & Polonsky, 2013). The issues around disclosures and ethical selling behavior are not restricted to emerging countries alone (Baker & Dumont, 2014). Naïve investors around the world rely on equity analysts' recommendations to invest in the equities market.…”

“…A study was done by Baker and Dumont (2014) to find that equities with "buy" ratings significantly underperform relative to equities with "hold" ratings, decreasing the FWB of general public/retail investors.…”

“…Figure 1 shows all of the article counts over the years (longitudinal) from both marketing and non-marketing areas of consumer Wong and Lynn (2019), Limbu and Sato (2019), Mende et al (2020), Nicolini and Cude (2019), Cook and Sadeghein (2018), Netemeyer et al (2018), Pereira and Coelho (2019), Xiao and O'Neill (2018), Xiao and Porto (2017), Haws et al (2016), Santos et al (2016), Komarova Loureiro andGonzalez (2015), Mende and van Doorn (2015), Postmus et al (2015), Winterich and Nenkov (2015), Norvilitis (2014), Baker and Dumont (2014), Shim et al (2013), Collins et al (2013), Guo et al (2013), Schmeiser and Seligman (2013), Lyons et al (2007), Devaney and Kim (2003), Kinsey and Lane (1978), Bhutta et al (2015), Lim et al (2014), Xiao et al (2014), Tach and Greene (2014), Meier and Sprenger (2013), Donnelly et al (2012), Gutter and Copur (2011), Malone et al (2010), Shim et al (2009), Forry ( 2009), Bonke and Browning ( 2009), Norvilitis et al (2006), Prawitz et al (2006), O'Neill et al (2005, Baek and DeVaney (2004), …”

Impacts of Conflicts of Interest in the Financial Services Industry

“…Kelly et al (2012) presents evidence from an experiment with retail investors in Singapore suggesting that investors are influenced by analysts' recommendations and that warnings about bias only partially influence a recommendation's impact. Baker and Dumont (2014) analyze the performance of "buy" and "hold" ratings and survey retail investors about their reliance on analyst recommendations. The authors find that "buy" ratings significantly underperform "hold" ratings, but that retail investors rely on these recommendations with making investment decisions.…”