Does the value of equity research differ between independent and brokerage analysts? : sell-side equity research and stock returns in Finland
Alatalo, Joona (2019)
Alatalo, Joona
2019
Kauppatieteiden tutkinto-ohjelma - Degree Programme in Business Studies
Johtamisen ja talouden tiedekunta - Faculty of Management and Business
This publication is copyrighted. You may download, display and print it for Your own personal use. Commercial use is prohibited.
Hyväksymispäivämäärä
2019-04-25
Julkaisun pysyvä osoite on
https://urn.fi/URN:NBN:fi:tuni-201904261556
https://urn.fi/URN:NBN:fi:tuni-201904261556
Tiivistelmä
The purpose of this research is to examine whether investors are better served by following the recommendations of independent analysts compared to brokerage analysts during 2010–2018 in the Finnish stock market. This study contributes to the existing literature by examining the recommendation performance of purely independent equity research, which most past studies have been unable accomplish due to small sample sizes. Furthermore, the performance is compared to traditional brokerage research to examine whether the value of equity research differs between independent and brokerage analysts.
The data for this study extends from the year independent research begun in the Finnish market from February 2010 through May 2018. The data consists of stock recommendations for stock listed companies in OMX Helsinki. The final sample consists of 3438 recommendations issued by 24 research firms. The hypotheses are tested by examining the differences in average recommendation levels, announcement period returns, and long-term portfolio returns. Univariate analyses utilize two-sample t-test, two-sample Kolmogorov-Smirnov test and chi-squared test, whereas multivariate analyses are conducted with ordinary least squares (OLS) regression analysis.
The results show that brokerage analysts are relatively more optimistic than independent analysts. However, the market initially values the recommendation revisions from both analyst types equally. In contrast, independent analysts clearly outperform in the long-term by generating gross abnormal returns of approximately 10 % annualized, whereas brokerage analysts do not generate abnormal returns. The abnormal returns are robust to controlling for transaction costs and less frequent portfolio rebalancing. Moreover, the outperformance is more pronounced for stocks with greater information asymmetry. In addition, signs of the market learning to predict on-going research processes is documented, however, the tests do not control for other events taking place before the issuance of recommendations.
The data for this study extends from the year independent research begun in the Finnish market from February 2010 through May 2018. The data consists of stock recommendations for stock listed companies in OMX Helsinki. The final sample consists of 3438 recommendations issued by 24 research firms. The hypotheses are tested by examining the differences in average recommendation levels, announcement period returns, and long-term portfolio returns. Univariate analyses utilize two-sample t-test, two-sample Kolmogorov-Smirnov test and chi-squared test, whereas multivariate analyses are conducted with ordinary least squares (OLS) regression analysis.
The results show that brokerage analysts are relatively more optimistic than independent analysts. However, the market initially values the recommendation revisions from both analyst types equally. In contrast, independent analysts clearly outperform in the long-term by generating gross abnormal returns of approximately 10 % annualized, whereas brokerage analysts do not generate abnormal returns. The abnormal returns are robust to controlling for transaction costs and less frequent portfolio rebalancing. Moreover, the outperformance is more pronounced for stocks with greater information asymmetry. In addition, signs of the market learning to predict on-going research processes is documented, however, the tests do not control for other events taking place before the issuance of recommendations.