The value of stock analysts' recommendations: Evidence from emerging markets Fariborz Moshirian, David Ng, Eliza Wu ⁎ School of Banking and Finance, University of New South Wales, Sydney, NSW 2052, Australia abstract article info Article history: Received 26 March 2008 Received in revised form 11 November 2008 Accepted 12 November 2008 Available online 24 November 2008 JEL classification: G14 G15 Keywords: Stock analysts Emerging stock markets Stock performance This is the first study to empirically examine post-recommendation buy and hold abnormal returns in emerging markets. By analyzing a sample of 13 emerging countries over the decade from 1996 to 2005, we find that stock prices react strongly to stock analyst recommendations and revisions. We also find that there is a stronger positive bias in analyst recommendations and revisions in emerging markets compared with that in developed markets. In our cross-sectional analysis, we find that the Market-to-Book ratio is the primary indicator for Buy and Strong Buy recommendation regressions. This indicates that stock analysts in emerging markets prefer high growth stocks with attractive characteristics. © 2008 Elsevier Inc. All rights reserved. 1. Introduction Emerging markets are often viewed by investors in developed markets to be too exotic, too risky, too hard to research on and too difficult to invest in. As such, there should be a significant informa- tional role for security analysts providing stock recommendations in emerging markets. This is the first study to explicitly investigate the value of stock analyst recommendations and revisions within emerging markets. In recent years, emerging markets have experienced astonishing levels of growth, significantly outpacing their more developed counter- parts. As such, investment banking firms have not allowed this growth to pass unnoticed, putting particular emphasis on emerging security markets. Accordingly, the top investment banks and fund managers are poised to explore the abundant opportunities offered by emerging markets. On behalf of their clients, capable analysts are actively researching the emerging markets that are held in high regard. In turn, their knowledge of such markets and their investment insights are highly valued by investors. To a certain degree, the analyst is analogous to a stock promoter, and their opinions inevitably exert a significant influence on investors' decisions to purchase recommended stocks. The growth in the demand for analysts' skills can be explained in two ways. First, stock recommendations have been found to be particularly valuable to investors in developed countries. Empirical studies that have focused on the value of analyst recommendations include those of Barber, Lehavy, McNichols, and Trueman (2001), Boni and Womack (2006), Jegadeesh, Kim, Krische (2004) and Jegadeesh and Kim (2006), Lim and Kong (2004), Stickel (1995) and Womack (1996). These studies have confirmed that, by following a stock analyst's recommendations, one can earn abnormal returns in the markets studied. Second, aside from the fact that analysts are often good at picking mispriced stocks, the rapid expansion in the security business of emerging markets, the significant economic growth and the improving profitability of corporations in these regions has also acted to stimulate the growth in demand for analyst recommendations. A number of interesting questions can therefore be asked: given the fact that emerging markets are growing at a dramatic pace and that such markets are gaining significant attention from investment bankers, what is the value of stock analyst recommendations in emerging markets compared with similar recommendations in developed markets? What are the characteristics of such recommendations in developed and emerging markets — are analysts more biased in emerging markets? What factors are affecting the value of those recommendations? These are pertinent research questions given that the quality of information in emerging markets is argued to be different to that in developed markets (see Chan and Hameed (2006) and references therein). This paper examines the post-recommendation abnormal returns in emerging markets by uniquely applying Loughran and Ritter's (1995) Buy-and-Hold abnormal returns (BHARs) measure based on both emerging stock market indices and control firm benchmarks to assess the value added by analyst recommendations and revisions in 13 emerging markets around the world from 1996 to 2005. We find that stock prices react significantly to recommendations and revisions. Investors can therefore act on the valuable information provided by stock analysts to make abnormal gains in emerging markets. However, International Review of Financial Analysis 18 (2009) 74–83 ⁎ Corresponding author. Tel.: +61 2 93855889; fax: +61 2 93856347. E-mail address: e.wu@unsw.edu.au (E. Wu). 1057-5219/$ – see front matter © 2008 Elsevier Inc. All rights reserved. doi:10.1016/j.irfa.2008.11.001 Contents lists available at ScienceDirect International Review of Financial Analysis