On the investment value of sell-side analyst recommendation revisions in the UK

Abstract

This study conducts a comprehensive investigation into the investment value of sell-side analyst recommendation revisions in the UK, using a unique dataset from 1995 to 2013. Our rolling window analysis shows that, on average, upgrades fail to generate any significantly positive abnormal returns in any period of time, even before transaction costs. In addition, although downgrades could generate significantly negative abnormal gross returns over some periods of time, these observed significant returns disappear after accounting for transaction costs. Overall, our bootstrapping simulations confirm sell-side analysts' lack of skill in making valuable up/downward revisions to cover the size of transaction costs, irrespective of whether these revisions are made by high-ranking brokerage houses or not. However, an industry-based analysis shows that, within two high-tech industry sectors, i.e., Health Care and Technology sectors, sell-side analysts possess certain skill in making valuable downgrades over some periods of time and, in particular, such skill is sufficient to offset transaction costs.

The time‐varying performance of UK analyst recommendation revisions: Do market conditions matter?

“…(2001) estimate the average round‐trip transaction costs of 1.31% in the US. Despite the lack of readily available data regarding short selling costs in the UK, we assume a short selling cost of 3.0%, according to Su, Zhang, Bangassa, and Joseph (2019).…”

Loss sensitive investors and positively biased analysts in Hong Kong stock market

“…But, in a later section of our paper, we also estimate abnormal returns using the Fama & French 3-factor model (Eq. ( 7)) which has been used in some papers in the area (e.g., Rubanov and Nnadi 2018;Su et al 2019;Li et al 2020).…”

A Time-Series Bootstrapping Simulation Method to Distinguish Sell-Side Analysts’ Skill from Luck

“…Ryan and Taffler (2006) investigate a sample of 2,506 changes in analyst recommendations made by six London based brokerage houses over the period December 1993 to June 1995, showing that stock prices are significantly influenced by analyst recommendation revisions. Su et al (2018) argue that the two prior UK studies with the use of the limited observations and short sample periods examined generally suffer from small sample bias. Su et al (2018) conducts a comprehensive investigation into the investment value of sell-side analyst recommendation revisions in the UK, showing that, on average, upgrades fail to generate any significantly positive abnormal returns in any period of time, even before transaction costs.…”

“…Su et al (2018) argue that the two prior UK studies with the use of the limited observations and short sample periods examined generally suffer from small sample bias. Su et al (2018) conducts a comprehensive investigation into the investment value of sell-side analyst recommendation revisions in the UK, showing that, on average, upgrades fail to generate any significantly positive abnormal returns in any period of time, even before transaction costs. In addition, although downgrades could generate significantly negative abnormal gross returns over some periods of time, these observed significant returns disappear after accounting for transaction costs.…”

“…Specifically, the simulation method of Kosowski et al (2006) is more likely to find superior skill than that of Fama and French (2010). On the contrary, Gallefoss, Hansen, Haukaas, and Molnár (2015) argue that the bootstrapping simulation methods of Kosowski et al (2006) and Fama and French (2010) generate basically the same results (see, also, Su, Zhang, Bangassa, and Joseph, 2018). In order to enhance the precision of performance predictability, Kosowski, Naik, and Teo (2007) incorporate the seemingly unrelated assets Bayesian approach of Pástor and Stambaugh (2002), which is robust to model misspecification, into the bootstrapping simulation method of Kosowski et al (2006).…”