The investment value of analysts’ recommendations: evidence from the dartboard contest

Abstract

Briefly reviews previous research on the value of investment advisors’ recommendations and presents a study comparing portfolio returns from analysts’ recommendations in the Wall Street Journal’s “Dartboard” contest 1990‐1996, four randomly selected shares and the Dow Jones Industrial Average. Finds the analysts’ portfolio has the highest average returns and standard deviation; and that although some individual analysts have excellent scores in the contest, this is inversely related to the number of times they participate. Suggests that they do not significantly outperform other portfolios, but that contest winners’ tips have significant effects on the market, especially for non‐listed shares. Assesses the implications of the results for the efficient market hypothesis and the share prices of firms with higher asymmetric information.

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“…They question the profitability of following Business Week's small stock recommendations, uncovering even negative returns once the list is published. Additionally, Ferraro and Stanley (2000) conclude that a group of professional investors are unable to outperform a random selection of stocks in The Wall Street Journal's "Dartboard Contest." Although Choi (2000) discovers a potentially profitable effect from Value Line's recommendations, he concludes that transaction costs significantly reduce it.…”