Further evidence

Further evidence of the conflict in analysts recommendations is found when ratings of companies for which the analyst does underwriting and for companies for which they do not do the underwriting.  In 12 of 14 large firms, their recommendations on their own underwriting do worse than their recommendations on other companies in which they don’t do underwriting.   

Barber et al. found that after a string of years in which security analysts’ top stock picks significantly outperformed their pans, the year 2000 was a disaster. During that year the stocks least favorably recommended by analysts earned an annualized market-adjusted return of 48.66 percent while the stocks most highly recommended fell 31.20 percent, a return difference of almost 80 percentage points. This pattern prevailed during most months of 2000, regardless of whether the market was rising or falling, and was observed for both tech and non-tech stocks. While they didn’t conclude that the 2000 results are necessarily driven by an increased emphasis on investment banking by analysts, they do note that their findings should add to the debate over the usefulness of analysts’ stock recommendations to investors.

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