Biases and information in analysts' recommendations: The European experience

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Conference Proceeding
Proceedings of the European Financial Management Association 2005 Annual Meetings, 2005, pp. 1 - 42
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Financial analysts are viewed as playing an important intermediary role in gathering and interpreting data and thus converting it into useful information for the investment community. However, in recent years, it has become more apparent that the analysts come under much internal and external pressure when making their forecasts and recommendations. Jegadeesh et al (2004) have highlighted that this results in US equity analysts being biased towards large, high momentum growth stocks when making their recommendations which presumedly causes them to add little or no value in their own right. However, they find that the analysts recommendations changes do provide useful incremental investment insights. Azzi and Bird (2005) when evaluating Australian analysts similarly found that it was only the recommendation changes that provided useful information to investors. However, they also found evidence to suggest that the analysts attempt to adjust the biases in their recommendations over the market cycle. The implication being that biases identified in the Jegadeesh et al study may have been as much a reflection of the analysts pursuing the types of stocks that were performing well during the period rather than any long-term bias in these recommendations.
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