Assessing the relevance of sell‐side analyst recommendations

Abstract This paper evaluates the informational value and alpha‐generating potential of sell‐side analyst recommendations. We explore this by employing a monthly portfolio‐sorted long‐short strategy based on consensus analyst recommendations. Our findings indicate that the long‐short equal‐weighted and value‐weighted portfolios yield significant excess returns. However, the value‐weighted excess returns are primarily driven by the predictive power of the lowest decile (“sell” recommendations). The long‐short strategy for the value‐weighted portfolios yields a monthly excess return ranging from 1.36% to 1.57%, above the risk‐free rate. Our analysis further examines variations in recommendation effectiveness across economic cycles, industries, investment banks/brokers, and firm sizes, providing further insights into the value of analyst recommendations.