The Value of Analyst Recommendations: An International Perspective

Abstract

This thesis comprises three separate empirical studies which examine different aspects of analyst stock recommendations in international stock markets. The first study focuses on the information content of analyst recommendations at the country level. It shows that analyst recommendations aggregated at the country level predict international stock market returns. A trading strategy based on country-level recommendations yields an abnormal return of around 1% per month. Additional tests indicate that analyst recommendations aggregated at the country level provide useful information to predict future aggregate cash flows and associated market returns across different countries. The second study shifts the focus towards the standard deviation of analyst recommendations. In particular, it takes a closer look at Miller’s theory (1977) and tests whether the relationship between differences of opinion and stock returns exists at the country level. This study shows that country level disagreement measured from single stock recommendation dispersion is negatively related to future realized market returns. This study also provides evidence that growth stocks show a higher level of overpricing compared to value stocks. The aggregate difference of opinion remains significantly negatively related to market returns after allowing time-varying risk exposure. However, countries with more binding short-sales constraints do not show lower future market returns. Finally, the third study takes a broader perspective and investigates whether the short-term value impact of analyst recommendations varies across countries, and whether these differences are related to countries’ institutional environments. The results show that stock price reactions are systematically different across countries. In particular, stock prices react significantly stronger to recommendation announcements in countries with higher accounting standards, more effective security enforcement, better earnings quality, common law origins, and better protection of private property. However, the enforcement of insider trading laws does not significantly affect the value of recommendations at the country level. The results are robust after extending the event window to (-15, +15) and excluding confounding earnings announcements. Moreover, the institutional environment affects the value of recommendation revisions across countries as well.