Corporate Ownership & Control / Volume 4, Issue 4, Summer 2007/ Corporate Governance in Italy 78 INVESTMENT VALUE OF RECOMMENDATIONS IN THE ITALIAN STOCK EXCHANGE Enrico Maria Cervellati, Antonio Carlo Francesco Della Bina**, Pierpaolo Pattitoni*** Abstract Financial analysts’ research activity seems to be important for investors in their investment decisions. Understanding if financial analysts’ reports can influence the market and the degree of reliability of their forecasts has been a theme lively debated in the academic literature but also in the press, mainly because of recent financial scandals. The main objective of the paper is to calculate the investment value of financial analysts’ recommendations on companies listed in the Italian Stock Exchange and to verify the possibility of profiting from relying on the average consensus of recommendations. We have enclosed in the analysis all the 16,634 reports issued between the 1 st January 1999 and the 23 rd July 2004 and available on the website of the Italian Stock Exchange, constructing a unique database for Italy. After classifying companies by quarter, five portfolios are formed based on analysts’ average consensus to calculate the excess returns of each portfolio in each quarter. Our results suggest that analysts’ recommendations have indeed investment value, even if investors should carefully consider neutral recommendations that can be considered as negative ones. These results, furthermore, give some interesting regulatory suggestions for a policy maker that wants to ensure transparency in the markets. Keywords: stock market, information, investments * Department of Management – University of Bologna, Via Capo di Lucca, 34 - 40126 Bologna - Italy Tel. +39 051 2098103 - Fax. +39 051 246411, e-mail: enrico.cervellati@unibo.it Johns Hopkins University, The Paul H. Nitze School of Advanced International Studies SAIS The Bologna Center, Via Belmeloro, 11 - 40126 Bologna (BO) - Italy **Department of Management – University of Bologna, Via Capo di Lucca, 34 - 40126 Bologna - Italy Tel: +39 051 2098404 - Fax: +39 051 246411, e-mail: antonio.dellabina@unibo.it ***Department of Management – University of Bologna, Via Capo di Lucca, 34 - 40126 Bologna - Italy Tel: +39 051 2098404 - Fax: +39 051 246411 E-mail: pierpaolo.pattitoni@unibo.it, E-mail: ppattitoni@berkeley.edu 1. Introduction Financial analysts’ research activity seems to be very important for investors in deciding in which companies allocate their wealth. This is mainly due by the fact that gathering all the information necessary for investment decisions involves very high costs for single unsophisticated investors. Understanding if analysts’ reports can influence the market and the degree of reliability of their forecasts has been a theme lively debated in the academic literature but also in the press, mainly because of recent financial scandals (See, for example, the analysis of the Parmalat case proposed by Ferrarini and Giudici (2005) and the implications in terms of reliability of the information disseminated by financial analysts). The paper calculate the investment value of analysts’ recommendations on companies listed in the Italian Stock Exchange and verify the possibility of profiting from relying on the average consensus of recommendations. We have enclosed in the analysis all the 16,634 reports issued between the 1 st January 1999 and the 23 rd July 2004 and available on the website of Borsa Italiana (Borsa Italiana S.p.A. is the managing company of the Italian Stock Exchange). Our database is unique, since it includes all the publicably available reports in the considered period. Following art. 69 of the Consob (Consob (Commissione Nazionale per le Società e la Borsa) is the authority responsible of supervising the Italian Stock Exchange and the listed companies) Regulation on Issuers, in fact, all the reports issued by analysts must be transmitted to the Consob and, simultaneously, to Borsa Italiana that publish them. The archive of Borsa Italiana can be accessed on a free basis and includes reports issued from January 1999. To verify the value of the recommendations we have classified companies by quarter, based on the average consensus by analysts, and we have formed five portfolios based on this consensus. Furthermore, we have calculated the excess returns of each portfolio in each quarter. As far as we know, this is the first paper that proposes for Italy such an analysis. The results seem to support the hypothesis of the investment value of a portfolio strategy based on the average consensus of financial analysts. In the