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Do analysts have specific stock-picking skills?

Lunds universitet/Företagsekonomiska institutionen
Publication Date
  • Abnormal Return
  • Stock Recommendations
  • Industries
  • Analysts
  • Omxs
  • Business And Economics


Abstract Background: During the period 2000-2010, the majority of the Swedish populations’ savings were in equity funds. The consequence of households increased savings in stocks has resulted in a growing market for stock recommendations. However, whether analysts’ stock recommendations are reliable or not has been discussed for eight decades, ever since Alfred Cowles pioneering study “Can stock market forecasters forecast?” was published in 1933. The performance of analysts’ recommendations has been analyzed by numerous of researchers and many findings have confirmed that investors can obtained excess returns based on published information on a short term basis, but not in the long run. On the other hand, the existing research on stock recommendations performance give no further information for the investors whether there are differences between recommendations within different industries, thus if specific stock recommendations are more reliable than others. Purpose: The purpose with this thesis is to analyze whether buy recommendations for stocks listed on Stockholm Stock Exchange, issued by banks, are more reliable within certain industries. In order to examine if the recommendations are more reliable, it will be investigated in which industries buy recommendations have the highest excess return. Method: The excess return is defined as the return above the theoretical return provided by CAPM and the Fama and French Three Factor Model. In addition, the excess return from the recommended stocks over OMXAFGX index is calculated to capture the relative performance of each stock. A hypothesis testing is constructed, which aims to derive statistically conclusions and give a valid answer to the stated hypothesis. Conclusion: The results in this research are inconclusive. This means that it cannot be proved that abnormal returns can be earned by following recommendations issued by banks on Swedish Large Cap firms. Therefore, it could not be proved that analysts’ recommendations are more reliable within certain industries. Even though the results are not statistically significant, there are tendencies and indications that recommendations for firms within the health care industry could generate abnormal 90-day returns and that recommendations within the financials industry are less reliable than others.

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