Analysts make recommendations for stocks and many investors tend to follow them. This study was conducted to examine whether following these recommendations helps in generating `above normal' returns. The study was carried out with stock recommendations collected from The Business Line, one of the most widely read financial newspapers. Performance of the recommended stock was studied for time periods of one day, three days, one week, one month, and three months. Nifty returns for the same period were taken as the performance benchmark. It was found that the Indian stock market presents a distinct behavior in this regard. However, on average, publicly available recommendations do not produce any remarkable superior returns. Therefore, the investors who follow these recommendations may only be incurring additional transaction costs by following them and churning their portfolios.
Information,
the keyword in a knowledge society, plays a pivotal role in business. Specifically,
stock markets are of importance because of their pivotal role in transactions
of stock which provides data for prediction of price movement of securities. Investors
tend to rely on data generated by the stock market transactions, whether they
invest on their own or on behalf of others. The objective is to make optimal use
of information in order to extract maximum value from their investment decisions.
While information may be from a large number of sources, information from mass
media can be considered to be more influential since comparatively a larger number
of people are exposed to it.
Indian
capital markets have witnessed a phenomenal growth in the last few years. Investors
have become mature and use more facts and figures in making their decisions than
ever before. However, indecisiveness, poor access to information and inability
to research, on the part of the investors, make them depend on the recommendations
of security s, who are perceived to possess the required skills to recommend
purchase of good stocks at the right time for the best price (Reilly and Brown,
2003). As a result, the role and recommendations of stock s have become
increasingly crucial, and with the help of media, these s have responded
to the emergent need of investment decisions. It is observed that large number
of recommendations appears frequently in almost all financial newspapers, magazines,
business journals, and business channels on television. The question is whether
or not these recommendations really add value to the investors' decisions. Which
is more valuable—recommendations based on analysis of fundamentals or technical
attributes? Which call is effective—buy call or sell call? Are their effects
long-lasting or is the market efficient enough to adjust the prices to reflect
the new information? Such questions arise in case of the recommendations appearing
in mass media to which large numbers of investors are exposed.
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