Analyzing the Analysts: When Do Recommendations Add Value?
Source: Jegadeesh, Kim, Krische & Lee (2004) · The Journal of Finance · DOI: 10.1111/j.1540-6261.2004.00657.x
TL;DR
Sell-side analysts tend to recommend glamour stocks (high momentum, growth, volume, expensive). The level of consensus recommendation adds value only among stocks with favorable quantitative characteristics; the change in recommendation is a more robust standalone predictor. Naïvely following recommendation levels can be costly.
What anomaly it documents
Predictor: change in consensus analyst recommendation (more robust than the level).
Direction: positive — upgrades predict higher returns; recommendation levels work only conditionally.
Shape: recommendation changes generalize; levels add value only among value/momentum stocks.
OSAP predictor: ChangeInRecommendation.
How to construct it
Sorting variable: change in consensus recommendation (and the level, conditioned on quant characteristics).
Universe: covered firms.
Portfolio formation: rank on recommendation changes.
Long / short: long upgrades, short downgrades.
Weighting: equal-weighted.
Rebalancing: monthly.
Evidence and replication
Period
Notes
Source
IS (1985–1998)
recommendation changes robust; levels conditional
this paper
OOS (post-2004)
recommendation-change signal persists
post-publication
OSAP (ChangeInRecommendation)
replicates
Chen & Zimmermann 2022
Why it might work
Information in revisions: changes convey new analyst information; levels reflect persistent glamour tilts.
Underreaction: prices adjust to changes with a lag.
Limitations and risks
Coverage requirement: followed firms only.
Optimism bias: sell-side levels skew bullish.
Turnover: changes update frequently.
Key references
Jegadeesh, N., Kim, J., Krische, S. & Lee, C. (2004) — Analyzing the Analysts — JF — DOI: 10.1111/j.1540-6261.2004.00657.x
Provenance: generated from the paper's abstract and metadata, not full text; sample periods and replication notes are indicative — verify against the source.
