Do Analysts Know It Better? Sell-Side Analyst Recommendations and Stock Returns in Finland

Abstract

In this thesis I analyze the association of sell-side analysts’ stock recommendations and stock returns in Finland between January 2006 and December 2015 on a daily basis. The focus is on profitability of an investment strategy utilizing these recommendations. I find that an investment strategy that buys the most favorable stocks and sells short the least favorable stocks on a daily basis yields an annual abnormal return of above 14 percent. Furthermore, I find that the abnormal returns are mostly pronounced on both small stocks and stocks that have small number of analysts covering the firm. In addition, I find that less-frequent portfolio rebalancing fades away the significance of abnormal returns, and that the abnormal returns turn into negative when the portfolio is rebalanced only on a monthly basis.