Bias With Stock Recommendations Following Essay

Excerpt from Essay :

As Mokoaleli-Mokoteli et al. (2009) point out, though, previous research has confirmed that while it is accurate to suggest that analysts provide optimistic reports on the majority of the stocks they include in their analytical portfolios, such recommendations do not routinely affect the market in any substantive way. According to these researchers, "After accounting for risk and transaction costs, investors do not earn better than average returns from following analysts' stock recommendations" (Mokoaleli-Mokoteli et al., 2009, p. 388). There is also the matter of the human propensity to be overly optimistic in those situations where there are complex issues involved, a tendency that has also been well documented in the scholarly research (Mokoaleli-Mokoteli et al., 2009). According to Mokoaleli-Mokoteli and his colleagues, "Both analyst overoptimism, as measured by the tone of their report, and conflicts of interest distinguish between new buy and new sell recommendations. This is consistent with the perception that analysts make reality look better than it is, even though the evidence is that they get the majority of their new buy recommendations wrong" (2009, p. 414). This finding is also consistent with previous research that confirms analysts issue forecasts that are more optimistic based on available incentives (Mokoaleli-Mokoteli et al., 2009).

Conclusion

The research showed that the findings obtained by Cao and Kohlbeck (2011) are consistent with previous research that showed asymmetry was associated with a general information processing bias among analysts who were deemed of lower quality. Significantly, this type of bias has lesser potential to adversely affect analysts who were deemed superior based on their proven track records of turning their earnings forecasts into recommendations. The findings by Cao and Kohlbeck were also congruent with the body of knowledge that confirms the ability of superior analysts to differentiate stock picking compared to their less qualified counterparts. The recommendations provided by those analysts who were deemed to be superior were shown to be less likely to postpone the release of bad news concerning companies is important for those investors who concentrate on downside risk and trade on security analysts' stock recommendations. Finally, the research showed that these types of studies are important because analyzing the specific characteristics of financial analyst recommendations is important because prior research suggests that analyst research is particularly valuable and informative in bad news scenarios.…

Sources Used in Document:

References

Cao, J. & Kohlbeck, M. (2011). Analyst quality, optimistic bias, and reactions to major news. Journal of Accounting, Auditing & Finance, 26(3), 502 -- 526.

Mokoaleli-Mokoteli, T., Taffler, R.J. & Agarwal, V. (2009, April/May). Behavioural bias and conflicts of interest in analyst stock recommendations. Journal of Business

Finance & Accounting, 36(3) & (4), 384 -- 418.

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