This extract from FT’s Lex is a must read.
Research by hedge fund GLG, which tracked share price movements before and after broker announcements, does show a connection between recommendations and a stock’s subsequent performance.
It found that when an average stock burdened with a consensus “sell” recommendation is given a “buy” rating, the underperforming price turns round and, after 100 days, the stock can be expected to outperform the market by about 2 per cent. And when a large broker issues the recommendation, the effect is almost half as much again.
For example, K+S, the German chemical maker and previously a consensus “sell”, was upgraded to “buy” in January by Bank of America Merrill Lynch and its share price jumped 12 per cent. Of course, many other factors influence share prices, but on average this effect is repeated.
Proving causality, though, is difficult. Typically, a broker issues a recommendation immediately after the company announces news such as earnings figures or a landmark acquisition. It is almost impossible to determine how much of the subsequent share price movement is due to the broker’s advice and how much would have occurred anyway based on the news. “