The impact of the internet bubble on broker recommendations

Abstract

Purpose The purpose of this paper is to investigate the unusual market conditions of the dot-com bubble that may affect the quality of financial analysts’ evaluations and their relevance for investors. Design/methodology/approach Based on a sample of more than 1 million recommendations issued by the top 100 brokerage houses of 1,323 companies listed in the European DJ Stoxx 600 from 12/31/1992 to 12/31/2005, the authors measured, via new metrics, the dispersion of broker recommendations, their quality and the changes in the rankings of brokerage houses. Findings The results showed that the dispersion and quality of recommendations are strongly affected and that the reliability of the reputation of brokerage houses is increased. Practical implications A close monitoring of the quality of recommendations measured by dispersion and performance as well as ranking volatility should be a useful tool for investors. Originality/value This leads to the conclusion that analysts’ recommendations should be used cautiously during troubled times.