Analyst Recommendations And Stock Returns: Evaluating the performance of analysts covering stocks publicly traded on the Stockholm Stock Exchange

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In addition to evaluating the performance of security analysts covering stocks publicly traded on the Stockholm Stock Exchange (SSE) we investigate the existence of any profitable trading strategies based on analyst recommendations. Performance is analyzed by employing a method of forming (daily rebalanced) portfolios based on the consensus recommendation for each covered company during a time period of five years. The returns earned from each portfolio are further evaluated against benchmarks with both value and equally weightings. In order to measure the impact of trading, and hence the cost of following the advices by analysts, we also record each portfolio?s annual turnover. In addition, we also evaluate if the value of analyst recommendations are robust across time, different market conditions and capitalizations. Our obtained results suggest that stock recommendations issued on companies traded at SSE generates investment value and that analysts´ thereby can be considered to possess a stock picking ability. We further find, somewhat surprisingly, that analysts´ stock picking ability is most pronounced for well performing Large Cap stocks and underperforming Small Cap stocks. Encountering for the cost of trading we finally find that the most suitable trading strategy, employing an equally weighted approach, would be to purchase the most favorable recommended stocks while simultaneously selling shor...