Analyzing the Analysts: When Do Recommendations Add Value?

We show that analysts from sell-side firms generally recommend "glamour" (i.e., positive momentum, high growth, high volume, and relatively expensive) stocks. Naïve adherence to these recommendations can be costly, because the "level" of the consensus recommendation adds value only among stocks with favorable quantitative characteristics (i.e., value stocks and positive momentum stocks). In fact, among stocks with unfavorable quantitative characteristics, higher consensus recommendations are associated with worse subsequent returns. In contrast, we find that the quarterly "change" in consensus recommendations is a robust return predictor that appears to contain information orthogonal to a large range of other predictive variables. Copyright 2004 by The American Finance Association.