The Predictive Content of Aggregate Analyst Recommendations

Abstract

Using more than 350,000 sell-side analyst recommendations from January 1994 to August 2006, this paper examines the predictive content of aggregate analyst recommendations. We find that changes in aggregate analyst recommendations forecast future market excess returns after controlling for macroeconomic variables that have been shown to influence market returns. Similarly, changes in industry-aggregated analyst recommendations predict future industry returns. Changes in aggregate analyst recommendations also predict one-quarter-ahead aggregate earnings growth. Overall, our results suggest that analyst recommendations contain market-and industry-level information about future returns and earnings.

Discussion of “Analysts’ industry expertise”

“…In contrast to the lack of significant results in Boni and Womack (2006), Howe et al (2009) conclude that changes in aggregated recommendations are positively associated with future returns and earnings. They conclude that ''the information set that [firm] analysts use to make their recommendations includes market-and industry-level information.…”

“…For example, footnote 13 describes how they omit reissued recommendations triggered by the change in rating systems that occurred during 2002 or reissuances of recommendations upon acquisition of one brokerage by another. This is consistent with Howe and Unlu (2009), who include a plot of the average monthly change in recommendations across time. That chart is shown in Fig.…”

“…In a subsequent study, Howe et al (2009) extend Boni and Womack (2006) by using more extensive data to examine whether aggregated firm recommendations have predictive content for future returns and accounting earnings. In contrast to the lack of significant results in Boni and Womack (2006), Howe et al (2009) conclude that changes in aggregated recommendations are positively associated with future returns and earnings.…”

Inside the “Black Box” of Sell‐Side Financial Analysts

“…Sell‐side financial analysts are of significant interest to academic researchers because of their prominent role in analyzing, interpreting, and disseminating information to capital market participants. While early research on analysts focused on the statistical properties of their earnings forecasts and on improving analysts’ expectations models (Fried and Givoly [], O'Brien [], Lys and Sohn [], Brown []), later research investigated the investment value of analysts’ earnings forecasts and stock recommendations (Womack [], Francis and Soffer [], Clement and Tse [], Howe, Unlu, and Yan []). Starting with Schipper [] and Brown [], however, researchers have suggested the literature should focus more on the context within which analysts make their decisions.…”

Local predictive ability of analyst recommendations

“…For example, Howe et al. () find that analyst recommendations aggregated at the market‐level predict future excess market returns and that analyst recommendations aggregated at the industry‐level predict future excess industry returns. Recent research also shows that stock returns are affected by local economic fundamentals such as the unemployment rate and housing collateral (Korniotis & Kumar, ).…”