An analysis of stockbroking firms' recommendations

Abstract

The market effi ciency theo ry assumes that all securities are correctly priced. However,

most stockbroking firms do provid e stock recommendations which aim to ' beat the

market'. Hence, if the market is efficient, one wonders what the economic value of

security analysis is.

The performance of security analysts ' recommendations has been extensively studied in

Australia, Canada, United Kingdom and the United States. Most of these research

studies examine the value of stock recommendations using form of residual analysis,

such as market adjusted returns and risk adjusted abnormal returns.

This Applied Research Project evaluates the performance of Singapore security

analysts ' recommendations. Two hundred and eighty-six buy recommendations by four

stockbroking firms from January 1990 to December 1992 were selected and analysed.

Market adjusted returns and risk adjusted abnormal returns were used as performance

measures for the recommendations.

From our study, we found that not all stockbroking firms could add value in their

recommendations. Among the four stockbroking firms, only one firm managed to

outperform the market consistently for all the investment horizons. Furthermore, by

comparing between the three strategies based solely on returns, it was observed that

generally, the short-term strategy was the best. However, there was no strategy that

was superior to others in terms of both risk and returns.It can be inferred from this study that ranking might exist among stockbroking firms in

the industry. The ranking will, in turn, motivate the stockbroking firms to excel in their

performance. This will definitely benefit the investing community in the long-term, as

they will be able to obtain more valuable recommendations from the stockbroking

firms.