Profitability of investment strategies developed on the basis of buy and sell recommendations

• Authors: Wnuczak Paweł
• Languages of publication: EN

Abstracts

EN

Aim/purpose – The paper has two objectives. The first is to examine the profitability of applying investment strategies based on “buy” and “sell” recommendations issued by stock market analysts. The second objective is to validate that analysts who issue a recommendation may not be impartial (not supporting any of the sides involved in an argument) because the largest group of recommendations issued is “buy” recommendations. Design/methodology/approach – This study was conducted based on all the “buy” and “sell” recommendations issued during the period between January 1, 2004 and December 31, 2016 for companies listed on the Warsaw Stock Exchange, using data from www.bankier.pl. The annual forecast rates of return were determined for all the recommendations included in the survey. The expected rates of return were determined for each recommendation based on the information collated from the Bloomberg database. The regression analysis enabled the exploration of the relationship between the actual rates of return and the rates of return predicted in recommendations. Findings – It was determined that investing on the basis of the information included in “sell” recommendations might make it possible to avoid unprofitable investments. At the same time, the study shows that an investment strategy compliant with “buy” recommendations does not let the investor achieve the expected rates of return on an investment in the capital market in the long term. Research implications/limitations – The conducted research could be an important source of information for stock market investors’ decision-making regarding investments. Originality/value/contribution – Despite the topic of recommendation effectiveness being very important from the perspective of capital market theory and practice, it is still unclear whether investing based on information provided in stock market recommendations can be a profitable strategy in the long run. The study offers a bridge to fill the existing research gap.

Keywords

EN

Investment; Recommendations; Stock exchange

• Publisher: Uniwersytet Ekonomiczny w Katowicach
• Journal: Journal of Economics and Management
• Year: 2021
• Volume: 43
• Pages: 317-338

Contributors

author

Wnuczak Paweł

• Department of Finance. Kozminski University, Warsaw, Poland

References

• Asquith, P., Mikhail, M. B., & Au, A. S. (2005, February). Information content of equity analyst reports. Journal of Financial Economics, 75(2), 245-282. https://doi.org/ 10.1016/j.jfineco.2004.01.002
• Barber, B., Lehavy, R., McNichols, M., & Trueman, B. (2001, April). Can investors profit from the prophets? Security analyst recommendations and stock returns. The Journal of Finance, 56(2), 531-563. https://doi.org/10.1111/0022-1082.00336
• Barber, B., Lehavy, R., McNichols, M., & Trueman, B. (2003). Reassessing the returns to analysts’ stock recommendations. Financial Analysts Journal, 59(2), 88-96. https://doi.org/10.2469/faj.v59.n2.2517
• Barber, B. M., Lehavy, R., & Trueman, B. (2010). Ratings changes, ratings levels, and the predictive value of analysts’ recommendations, Financial Management, 39(2), 533-553. https://doi.org/10.1111/j.1755-053X.2010.01083.x
• Bidwell, C. (1977, January-February). How good is institutional brokerage research? The Journal of Portfolio Management, 3(2), 26-31. Retrieved from https://www.jstor. org/stable/4470885
• Biedrzyński, R. (2008). Wycena w rekomendacjach sporządzanych przez biura maklerskie a cena rynkowa spółek notowanych na Giełdzie Papierów Wartościowych w Warszawie [Valuation in recommendations prepared by brokerage houses and the market price of companies listed on the Warsaw Stock Exchange]. Retrieved April 15, 2015 from http://biedrzynski-consulting.home.pl/autoinstalator/wordpress/wp-content/uploads/2011/11/Wycena-w-rekomendacjach-giełdowych.pdf
• Bjerring, J., Lakonishok, J., & Vermaelen, T. (1983). Stock prices and financial analysts recommendations. The Journal of Finance, 38(1), 187-204. https://doi.org/10.2307/ 2327646
• Bonini, S., Zanetti, L., Bianchini, R., & Salvi, A. (2010). Target price accuracy in equity research. Journal of Business Finance & Accounting, 37(9-10), 1177-1217. https:// doi.org/10.2139/ssrn.676327
• Bradshaw, M. T., Brown, L. D., & Huang, K. (2013). Do sell-side analysts exhibit differential target price forecasting ability? Review of Accounting Studies, 18, 930-955. https://doi.org/10.1007/s11142-012-9216-5
• Buzała, P. (2013). Rekomendacje giełdowe a wybrane charakterystyki rekomen-dowanych spółek. Analiza z Giełdy Papierów Wartościowych w Warszawie [Analysts’ recommendations and selected characteristics of recommended stock. Evidence from Warsaw Stock Exchange]. Zeszyty Naukowe Uniwersytetu Szcze-cińskiego. Finanse, Rynki Finansowe, Ubezpieczenia, 63, 65-75.
• Carvalho, S., & Barajas, A. (2013). Parameters that provide higher explanation estimat-ing betas in the Portuguese Stock Market. Ekonomska istraživanja – Economic Research, 26(2), 117-128. https://doi.org/10.1080/1331677X.2013.11517610
• Cornett, M. M., Tehranian, H., & Yalcin, A. (2007). Regulation fair disclosure and the markets reaction to analyst investment recommendation changes. Journal of Bank-ing & Finance, 31(3), 567-588. https://doi.org/10.1016/j.jbankfin.2005.12.009
• Czapkiewicz, A., & Masłoń, W. (2009). Wpływ portfela rynkowego oraz opóźnienia wybranych rynkowych czynników na przekrojowe stopy zwrotu [The influence of the market portfolio and delayed some market factors on the expected stock re-turns]. Ekonomia Menedżerska, 5, 97-106. Retrieved from http://yadda.icm.edu.pl/ baztech/element/bwmeta1.element.baztech-article-AGH8-0005-0007/c/Czapkiewicz.pdf
• Diefenbach, R. E. (1972). How good is institutional brokerage research? Financial Ana-lysts Journal, 28(1), 54-60. https://doi.org/10.2469/faj.v28.n1.54
• Fernandez, P., & Bermejo, V. J. (2009). β = 1 Does a Better Job than Calculated Betas (Working Paper, No. 825). Barcelona: IESE Business School, University of Navarra. Retrieved from https://media.iese.edu/research/pdfs/DI-0825-E.pdf
• Flotyński, M. J. (2015). Średnia rynkowa stopa zwrotu indeksu WIG jako narzędzie w modelu CAPM do predykcji zmian cen akcji notowanych na rynku regulowanym w latach 2009-2013 [The average market rate of return of WIG as a tool in CAPM model for the prediction of price changes of stocks listed on the regulated market in 2009-2013]. Studia i Prace WNEiZ US, 40(1), 153-169. https://doi.org/10.18276/ sip.2015.40/1-12
• Gadomska, O., Izbrandt, M. K., & Włosik, K. (2017). Stock recommendations – an analysis of usefulness. Finanse, 1, 355-371. Retrieved from https://journals.pan. pl/dlibra/publication/117838/edition/102475/content
• Goff, D., Hulburt, H., Keasler, T., & Walsh, J. (2008). Isolating the information content of equity analysts’ recommendation changes, post Reg FD. Financial Review, 43(2), 303-321. https://doi.org/10.1111/j.1540-6288.2008.00195.x
• Groth, J. C., Lewellen, W. G., Schlarbaum, G. G., & Lease, R. C. (1979). An analysis of brokerage house securities recommendations. Financial Analysts Journal, 35(1), 32-40. https://doi.org/10.2469/faj.v35.n1.32
• Gurgul, H. (2006). Analiza zdarzeń na rynkach akcji. Wpływ informacji na ceny papierów wartościowych. Kraków: Oficyna Ekonomiczna.
• Hobbs, J., Keasler, T. R., & McNeil, C. R. (2012). Short selling behavior and Mad Money. The Financial Review, 47(1), 65-89. https://doi.org/10.1111/j.1540-6288.2011.00321.x
• Jegadeesh, N., & Kim, W. J. (2006). Value of analyst recommendations: International evidence. Journal of Financial Markets, 9(3), 274-309. https://doi.org/10.1016/ j.finmar.2006.05.001
• Jegadeesh, N., Kim, W. J., Krische, S., & Lee, C. (2004, June). Analyzing the analysts: When do recommendations add value? Journal of Finance, 59(3), 1083-1124. https://doi.org/10.1111/j.1540-6261.2004.00657.x
• Keasler, T. R., & McNeil, C. R. (2010). Mad Money stock recommendations: Market reaction and performance. Journal of Economics and Finance, 34(1), 1-12. https:// doi.org/10.1007/s12197-008-9033-7
• Kerl, A. (2011). Target price accuracy. Business Research, 4(1), 74-96. https://doi.org/ 10.1007/BF03342727
• Konopko, Ł. (2012). Sprawdzalność rekomendacji domów maklerskich [Verifiability of recommendations of brokerage houses]. XVII Międzynarodowa Konferencja Stu-denckich Kół Naukowych w Opolu. Retrieved from http://wiadomosci.stockwatch. pl/raport-sprawdzalnosc-rekomendacji-domow-maklerskich,strategie-inwestycyjne, 23802
• Logue, D. E., & Tuttle, D. L. (1973). Brokerage house investment advice. The Financial Review, 8(1), 38-54. https://doi.org/10.1111/j.1540-6288.1973.tb01440.x
• Loh, R. K., & Stulz, R. M. (2011, February). When are analyst recommendation changes influential? The Review of Financial Studies, 24(2), 593-627. Retrieved from https:// www.jstor.org/stable/40985858
• Markowski, L. (2003). Analiza ryzyka i wycena aktywów kapitałowych na przykładzie GPW w Warszawie [Risk analysis and capital assets pricing – an example of the Warsaw Stock Exchange]. Acta Universitatis Lodziensis, Folia Oeconomica, 166, 209-224. Retrieved from https://dspace.uni.lodz.pl/xmlui/bitstream/handle/11089 /6850/203-218.pdf?sequence=1&isAllowed=y
• Michaely, R., & Womack, K. L. (1999). Conflicts of interest and the credibility of underwriter analyst recommendations. The Review of Financial Studies, 12(4), 653-686. Retrieved from https://www.jstor.org/stable/2645961
• Mielcarz, P. (2016). Krótkookresowy wpływ rekomendacji na rynek giełdowy w Polsce [Short-term impact of the recommendations on the stock market in Poland]. War-szawa: Wydawnictwo Naukowe PWN.
• Mielcarz, P., Podgórski, B., & Waremczuk, P. (2007). Positive recommendations and abnormal returns on the Warsaw Stock Exchange in 2005-2006. In E. Urbańczyk (Ed.), The problems of company value management (pp. 181-190). Lewiston: Pub-lishing House Print Group.
• Moulya, V. H., & Mallikarjunappa, T. (2020). Does an analyst’s stock recommendation cause anomalous price drift? A study of the Indian Stock Market. South Asian Journal of Management, 27(1), 150-167. Retrieved from http://web.b.ebscohost. com/ehost/pdfviewer/pdfviewer?vid=3&sid=9bc7ef45-b969-411e-a4b2-d12c889de 74b%40pdc-v-sessmgr02
• Ocieszak, M., & Wnuk, K. (2019). Quo vadis mergers and acquisitions in software business? In K. S. Soliman (Ed.), 34th International-Business-Information-Management- -Association (IBIMA) Conference, Madrid, NOV 13-14 (pp. 5502-5507). IBIMA.
• Olbryś, J. (2010). Zastosowanie wskaźnika tolerancji ryzyka do oceny poziomu agresywności ryzyka portfela funduszu inwestycyjnego [Application of the risk tol-erance index to assess the level of risk aggressiveness of the investment fund’s portfolio]. Optimum Studia Ekonomiczne, 1(45), 60-72.
• Park, S. J., & Park, K. Y. (2019). Can investors profit from security analyst recommendations? New evidence on the value of consensus recommendations. Finance Research Letters, 30, 403-413. https://doi.org/10.1016/j.frl.2018.11.008
• Polish 10-year government bonds. (2020). Received from Bloomberg database.
• Ryan, P., & Taffler, R. J. (2006, December). Do brokerage houses add value? The market impact of UK sell-side analyst recommendation changes. The British Account-ing Review, 38(4), 371-386. https://doi.org/10.1016/j.bar.2006.07.015
• Sant, R., & Zaman, M. A. (1996). Market reaction to Business Week ‘Inside Wall Street’ column: A self-fulfilling prophecy. Journal of Banking & Finance, 20(4), 617-643. https://doi.org/10.1016/0378-4266(95)00025-9
• Songwon, S. (2006). A review and comparison of methods for detecting outliers in univariate data sets (Master Thesis, University of Pittsburgh). D-Scholarship. http:// d-scholarship.pitt.edu/7948/1/Seo.pdf
• Stickel, S. (1995). The anatomy of the performance of buy and sell recommendations. Financial Analysts Journal, 51(5), 25-39. Retrieved from https://www.jstor.org/stable/ 4479867
• Su, C., Zhang, H., Bangassa, K., & Joseph, N. L. (2019). On the investment value of sell-side analyst recommendation revisions in the UK. Review of Quantitative Finance and Accounting, 53, 257-293. https://doi.org/10.1007/s11156-018-0749-y
• Wnuczak, P. (2011). Zastosowanie ekonomicznej wartości dodanej (EVA) w procesie optymalizacji struktury kapitału przedsiębiorstwa [The application of Economic Value Added (EVA) in process of optimizing capital structure of the company]. Zeszyty Naukowe Uniwersytetu Szczecińskiego, Finanse, Rynki Finansowe, Ubezpieczenia, 38, 505-516.
• Wnuczak, P. (2015). Skuteczność rekomendacji wydawanych przez analityków giełdowych w okresach stagnacji na rynkach kapitałowych [Effectiveness of rec-ommendations issued by stock market analysts in periods of stagnation on capital market]. Prace Naukowe Uniwersytetu Ekonomicznego we Wrocławiu, 412, 333-342. https://doi.org/10.15611/pn.2015.412.26
• WIG. (2020). Received from Bloomberg database.
• Woolridge, J. (2004). Performance of stocks recommended by brokerages. The Journal of Investing, 13(1), 23-33. https://doi.org/10.3905/joi.2004.391039
• Womack, K. L. (1996). Do brokerage analysts’ recommendations have investment value? The Journal of Finance, 51(1), 137-167. https://doi.org/10.1111/j.1540-6261.1996.tb05205.x
• Zaremba, A., & Konieczka, P. (2015). The profitability of following analyst recommendations on the Polish Stock Market. eFinanse. Financial Internet Quarterly, 11(1), 22-31. https://doi.org/10.1515/fiqf-2016-0103

Identifiers

ISSN

1732-1948