Outline
- Abstract
- Resumen
- Keywords
- Palabras Clave
- Introduction
- Literature Review
- Empirical Analysis
- Data Description
- Methodology
- Results
- Descriptive Analysis
- Tests Performed
- Discussion
- References
رئوس مطالب
- چکیده
- مقدمه
- مروری کوتاه بر کار های پیشین
- تحلیل های تجربی
- توصیف داده
- روش شناسی
- نتایج
- تست های انجام شده
- بحث
Abstract
The stock analysts have a relevant role in the capital market, since, directly or indirectly, they contribute to the paper pricing and to the composition of the investment portfolio. The purpose of this study is to verify if it is possible to obtain extraordinary returns, above those offered by a market portfolio, with the monitoring of the stock recommendations issued by Brazilian capital market analysts, one of the most important in Latin America. Based on a wide range of consensual recommendations concerning the period from 2000 to 2010, and with the monitoring of the historical series of paper returns covered by the analyses, the performance of two portfolios were compared, one formed by stocks that received favorable and the other one formed by stocks that received unfavorable analyst recommendations. The results showed bias in recommendations, since there is, systematically, a greater number of favorable against unfavorable recommendations. The results mainly showed that the analysts were unable to identify the stocks that actually offered greater returns within the period considered.
Keywords: Capital market - Investment portfolio - Stock AnalysisConclusions
Descriptive analysis Table 2 shows, for each year, in the period from 2000 to 2010, the number of analysts’ recommendations analyzed, the number of companies analyzed and the percentage of the coverage reached by the analyses versus the number of companies listed at the BM&FBovespa. Clearly, it is possible to observe an increase, in this period, in the number of analyses (from 267 in 2000 to 654 in 2010), of the companies covered by the analysts (from 75 in 2000 to 173 in 2010) and in the coverage percentage (from 15% in 2000 to 37% in 2010).
Fig. 1 shows the comparison between the favorable (Strong Buy and Buy) and unfavorable (Underperform and Sell) consensual recommendations, according to the similar classification by Moshirian et al. (2009). It is worth highlighting that the number of favorable recommendations is higher in all the years analyzed. For each unfavorable recommendation issued, there was, on average, the issuance of twelve favorable recommendations. This type of bias had already been detected by Elton et al. (1986), Francis and Philbrick (1993), Womack (1996), Lin and McNichols (1998), Jegadeesh and Kim (2006), Martinez (2004) and Moshirian et al. (2009) as well, and it can be explained, according to Lin and McNichols (1998) and Moshirian et al. (2009), by the conflict of interests existing between the analysts who evaluate and recommend stocks of client companies, or potential client companies, of those same analysts.
The data raised revealed that, in 2008, the favorable recommendations reached 75% of the total recommendations analyzed. The Brazilian capital market lived, until 2008, a very positive phase of meaningful growth in the number of investors, of companies promoting their processes of going public, in the evolution of the stock prices and in the financial volume negotiated. In spite of the global positive scenario, Moshirian et al. (2009) indicated evidences that the favorable bias in emerging markets, such as the Brazilian market, tends to be greater than that in the developed markets.
The data reveals that the bias in the issuance of favorable recommendations made by the analysts is quite significant. While 62% of the recommendations were Strong Buy and Buy, only 6% received unfavorable recommendations of the Underperform and Sell types. The percentages detected are compatible with the ones obtained by Francis and Soffer (1997), who reported 55.2% of buy recommendations, 38% neutral and 6.8% sell recommendations.
The analysts, along with the brokerage firms, earn with the movements in the investors’ stock portfolios independently of the profitability given by the portfolio. This may indicate that the motivation for the number of favorable recommendations is the profit generated by the volume of stock negotiations made by the investors.
Thus, the recommendations may be classified as optimist and may be reclassified according to the analysts’ preference, demonstrating that there can be interest in the profit, which comes from the brokerage commission in the purchase of stocks. Besides, other forces can influence the forecasts and recommendations as well. For instance, there are arguments about the existence of incentives for the analysts to issue more buy than sell recommendations since the buy recommendations generate a greater negotiation volume, as indicated by Lin and McNichols (1998). In this sense, Irvine (2001) documented a positive relation between the coverage of the analysts and the negotiation volume of the brokerage firm, highlighting that during the year analyzed, the analysts’ coverage was positively associated with the brokerage firm negotiation volume. Furthermore, the study also revealed that the brokers present significantly more negotiations with covered than with non-covered stocks, a result which had already been detected by Lin and McNichols (1998).