Prophets During Boom and Gloom Downunder

Financial analysts are viewed as playing an important intermediary role in gathering and interpreting information and passing it onto the investment community. However, in recent years, it has become more apparent that the analysts come under much internal and external pressure when making their forecasts and recommendations. Jegadeesh et al (2004) have highlighted that this results in US equity analysts being biased towards high momentum growth stocks when making their recommendations which presumedly causes then to add little or no value in their own right. However, they find that their recommendations changes do provide useful incremental investment insights. In this paper, we find that Australian analysts also consistently favour stocks with the similar characteristics and that their recommendations, if anything, have negative value with the exception of those made in relation to low momentum growth stocks. Similarly, we find that one could use the changes in the analysts' recommendations as a useful input into one's investment decisions. When we divided our sample up into the growth market of the last 1990's and the falling market of the early 2000's, we find that evidence to suggest that we might gain true insights into the unbiased views of the analysts by observing their recommendations changes. During the boom years, the analysts were moving their recommendations towards high momentum growth stocks but this changed during the gloom years with the recommendation changes then being tilted towards value stocks with a reduced emphasis on momentum and size. This suggests that although over time the analysts' recommendations reflect the internal and external pressures under which the analysts operate, that they do chase prevailing market conditions in the revisions that they make to these recommendations. Finally, the paper demonstrates a way for obtaining a fitted value for recommendation revisions which might provide a good way of incorporating them into one's investment decisions process